The True Edge
A Navarik Market Update
The People’s Republic of China has recently announced an open-ended project to develop a timeline to prohibit the production and sale of internal combustion engine (ICE) vehicles. This may continue the disruptive effect of electrical vehicles (EVs) after the UK and France announced similar bans, but in an odd way should come as a relief to the Chinese refining industry.
China’s quasi-liberalized petroleum refining industry has created various systemic challenges. Originally granted regulatory permission to operate to compensate for monolithic and expensive parastatals, China’s “teapot” refiners have been accused of over-building; they routinely operate at low utilization rates and have complicated state efforts to ensure a predictable supply of refined products. Meanwhile, projected growth in Chinese refined product consumption has been bullish. These creates the bookended logistical nightmare of large crude imports that nevertheless cannot be systematically converted to meet the needs of a country of 1.4 billion people.
At first glance, it appears any eventual ICE ban would only complicate the matter. But such a ban would also introduce a certain kind of market certainty and alleviate the upside pressure which is making the teapot problem all the more confounding. It would soften – but not eliminate – strong projections in fuel demand growth, and constrain further overbuilding of refining capacity. Therefore, it allows existing teapots the chance to “fill in” via increased throughput to meet the remaining demand until the actual implementation of the ban – possibly even through consolidation, which would be a clear win for state planners. Achieving the same kind of market balance (or its closest proxy in a managed economy) through increasing domestic crude production is not possible with China’s comparative lack of shale potential, so fixing the teapot problem from the demand side while at the same time burnishing the country’s environmental record is a natural conclusion.
However, this would represent a seismic shift in global oil markets. Strong demand in China has underpinned the cost-benefit analysis of most oil major investment decisions for a long time. As the shift to EVs gathers pace in Europe, China has signaled that it is ready to catch up much sooner than the market had perhaps expected.
•Center for Strategic and International Studies, April 10 2017
•Reuters, June 21 2017
•Financial Times, September 8 2017
•BBC, September 10 2017
Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.
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