China's fuel refiners look set to continue pumping out more diesel than the domestic market can handle until at least 2017, analysts say, setting the stage for continued growth in exports of the fuel to neighbouring markets.
China was a net importer of diesel as recently as 2011, but in the last two years has become a persistent exporter as productive capacity outpaced domestic demand growth.
The country reported record net exports of more than 2.7 million tonnes in the January to August period, partly contributing to a recent fall in Asian diesel refining margins to three-and-a-half year lows.
Overall Chinese refining margins have also fallen, and are currently around $4 a barrel, down from about $7 a barrel in the second quarter of the year, according to ICIS C1 Energy.
Even so, refiners maintain high output levels as they chase a share of the enduring strong demand for secondary products like jet fuel and gasoline.
Most Chinese refineries are configured to produce diesel as their primary fuel, and so are forced to crank out large volumes of diesel even as they focus mainly on producing other oil products.
The chief destinations of China's diesel shipments are Singapore, Vietnam, Philippines and Hong Kong, although flows to Africa have also picked lately.
CONTINUED EXPORT PUSH
Diesel is used to run trucks, tractors and generators at construction and mining sites, and is a bellwether of industrial activity and makes up about a third of China's total oil demand. But a slowdown in construction projects and coal demand has dampened demand for the industrial fuel over the past year.
China's diesel demand growth will be flat this year and will recover slightly at the earliest next year, according to four oil consultancies. A faster pace of recovery will not be seen at least until 2017 at the earliest, they added.
"It may take a few years for diesel demand (in China) to pick up, but even when it does, it will be low-growth. We won't see a huge growth at least towards the end of the decade," said Dr. Kang Wu of energy consultancy FGE.
This could mean continued record diesel exports from China, traders said. The country exported about 2.93 million tonnes of diesel from January to August this year, according to customs figures.
Sinopec's trading arm tied up new contracts with Sri Lanka and Bangladesh in the past two years, and shipped diesel for the first time to Kenya in July.
China National Offshore Oil Company (CNOOC) is expected to target the Philippines and Hong Kong for its first diesel exports from its Huizhou refinery, sources said.
Aggressive pricing is also helping Chinese diesel make headway. "They offer cargoes at very competitive prices and I think one reason for that is their cost could be cheaper than others," a North Asia refining source said.
STRONG GASOLINE AND JET FUEL
Jet fuel demand in China is set to grow around 9 percent next year while gasoline demand could grow by 8 percent, oil consultancy Wood Mackenzie estimates. At the same time, diesel consumption is seen staying depressed.
As a result, Chinese refiners are maximizing gasoline and jet fuel output, and cutting back on diesel.
Yet due to their diesel-centric configuration, most refiners are restricted in how much they can cut run rates if they want to maintain output of other products.
Most refiners are currently running at 35 to 37 percent of their capacity in diesel, compared with about 45 percent a few years ago, analysts said.
Still, traders expect diesel demand to pick up pace eventually, driven by growth in road freight tied to the planned development of the country's western region, which will create transport needs of raw materials and other capital goods, Woodmac's Suresh Sivanandam said.