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Poten: changing Chinese import patterns scramble tanker trades
Chinese crude oil imports in June 2022 fell to a four-year low and given the importance of China for global tonne-mile demand, this was bad news for the tanker market, says Poten & Partners’ most recent analysis
Statistics released by the Chinese General Administration of Customs showed that Chinese crude oil imports in June 2022 fell to a four-year low. Since Chinese crude oil imports are predominantly done on VLCCs (see Chart 1), these declines affect this segment the most.
However, the worst may be behind us. Movement data from Lloyd’s List Intelligence indicates that July imports should be significantly higher, as more crude is heading towards China. This increased activity is also reflected in VLCC freight rates, which have shown an upward trajectory in recent weeks. Is this recovery in Chinese oil demand and VLCC rates sustainable?
In the decade prior to Covid, Chinese crude oil imports were growing rapidly, from 4.1M barrels per day (b/d) in 2009 to 10.1M b/d in 2019, an average annual growth rate of 9.5%. Mainly as a result of the Covid pandemic, Chinese crude oil demand growth slowed to a crawl in recent years, with 2021 actually registering a 550,000 b/d decline. So far in 2022, Chinese imports have been quite volatile as temporary Covid lockdowns in major cities dampened oil demand and stunted the recovery.
Comparing Chinese oil import data for the first six months of 2022 with the same period last year shows a small decline in volume of about 200,000 b/d. This was largely due to the lockdowns. What the data also shows is a significant shift in suppliers in the January to June period. China imported more from Russia (+3.9%), Iraq (+2.2%), Malaysia (+50.5%) and the United Arab Emirates (+36). As a matter of fact, Russia became the largest source of Chinese crude imports in May 2022 and retained the top spot in June. Russian oil is discounted because of international sanctions and Chinese refiners are taking advantage. Russian imports, including pipeline supplies, were up 10% from one year ago. Countries that exported less to China in the first six months of 2022 included Angola (-13.8%), Brazil (-22.5%) and the United States (-45.7%).
Unfortunately for the tanker market, the countries that increased sales are medium to shorthaul suppliers from the Middle East and Asia, while the exporters that saw significant declines are the longhaul suppliers from the Atlantic Basin (West Africa, Brazil and the USA). As can be seen from Chart 2, this is not a recent development. This trend started during the pandemic. The increase in market share of the Asia/Australia region warrants further explanation: Despite the US sanctions on Iran, China continues to import from this country. However, most of the imports are done in two steps: first the Iranian oil gets shipped to a transfer point offshore Malaysia, from where it is then transported to China. That is why Malaysia shows up as one of the largest sources of Chinese crude oil imports. Malaysia is a crude oil producer and exporter in its own right, but most of the crude going to China originates from Iran (and previously Venezuela).
China currently has significant spare refining capacity, as oil trade regulations and lockdowns have capped refining utilisation in the first half of this year. However, the outlook for Chinese imports in the second half of 2022 and into 2023 is quite positive. In its latest Oil Market Report, the IEA expects Chinese oil demand to increase from 14.6M b/d in Q2 2022 to 15.7M b/d in Q3 and 15.9M b/d in Q4. For 2023, the IEA anticipates Chinese demand to average 16.2M b/d (+5.2%). Higher refining utilisation and the addition of new refining capacity will drive growth in import demand.
While demand growth is a positive for tanker utilisation, the tanker market will receive an additional boost if tonne-mile demand growth outpaces the increases in oil demand. The prospects for the next 6-18 months are good. Limited spare capacity in many of the Middle Eastern OPEC countries restricts their options. The expectation is that the growth in global oil demand will need to be satisfied by non-OPEC producers in the Atlantic Basin. The US is forecast to add 1M b/d of production between now and the end of 2023. Canada and Brazil are also expected to add 200,000 b/d each, with more oil from Guyana in the pipeline as well.
We expect the resumption of oil demand growth in China, combined with the multiplier of increasing tonne-miles will reverse the fortunes of the VLCCs in the remainder of 2022 and into 2023. Some of this has already started.
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