[SINGAPORE] After supplying the world with everything from Victoria's Secret lingerie to iPhones and Barbie dolls, China is now producing fuel that's finding its way to pumps across the globe.
The Asian manufacturing giant is turning a record amount of crude into refined products and sending some of it abroad at an unprecedented pace. That includes jet fuel sent to Europe last year, gasoline that went to Nicaragua in May and another cargo currently headed to the Panama Canal. Traders say more shipments may be coming.
Burgeoning output from processors including privately held plants known as teapots is swelling supply as the domestic economy cools. Meanwhile, higher US prices and weakening freight rates are making it more profitable to ship the fuel overseas, with delays in refining projects bolstering demand in Latin America.
The cargoes already contributed to a slide of about 30 per cent in Asian processing margins over the past year, and now threaten profitability in Europe and the Americas as well.
"China has become an accidental exporter of fuel," said John Driscoll, chief strategist at JTD Energy Services Pte Ltd, who has spent more than 30 years trading crude and petroleum in Singapore.
"They have overbuilt refining capacity, domestic demand has moderated and the teapots have entered the fray."
The country's refining capacity has doubled to about 14.5 million barrels a day this year from a decade ago and is forecast to rise more in coming years, according to Bloomberg calculations based on data from state-run China National Petroleum Corp.
While the surge was intended to meet domestic needs, economic growth that's fallen by half to less than 7 per cent from 2007 means the country will face a daily fuel surplus of about 700,000 barrels in four years' time, CNPC data show.
China's exports of gasoline and diesel have expanded by at least 30 per cent in 2016 after an unprecedented amount of shipments last year, customs data show. The government also started allowing the independent refineries to import crude and export fuel.
The supply has swamped Asia, eroding margins for producers in India and South Korea, and boosted stockpiles in the trading hub of Singapore. To escape the glut, traders are looking to take advantage of cheaper freight rates and sell products in parts of the world where prices are higher.
"China has become more competitive after years of expanding refining capacity," said Kang Yoo Jin, a Seoul-based commodities analyst at NH Investment & Securities.
"Refiners in the US and Europe will face intensified competition. It's very positive for China because shipments indicate profits are still being made even after sending cargoes far away."
The cost to carry about 300,000 barrels of gasoline from China to the US Gulf Coast would be about US$4 a barrel, according to data compiled by Bloomberg. US futures of the fuel have on average been about US$13 a barrel costlier than in Singapore since March, meaning it would potentially be profitable to ship a cargo even after accounting for freight, the data show.
Trafigura Beheer BV bought a cargo of gasoline from China's Hongrun refinery for loading from Laizhou in April, three traders said last month. The oil tanker Dalmacija left that port on April 21 and initially signaled its destination as Houston.
It's now off the coast of Nicaragua, according to ship-tracking data compiled by Bloomberg. Meanwhile, the Torm Laura left Luhuashan, Zhejiang, last month and is traveling to the Panama Canal.
Last May, China Petroleum and Chemical Corp, known as Sinopec, shipped 96,000 metric tons of jet fuel to Europe from its Hainan refinery as part of a strategy by the nation's biggest processor to expand markets for its fuels, according to the company.
"Fuel will be shipped to wherever there's demand, including places where they normally aren't sent," said Peter Lee, a Singapore-based analyst at BMI Research, a unit of Fitch Group.
Latin America is seen as a prime destination. The region's fuel consumption is expected to rise to 10.263 million barrels a day in 2025, outpacing its predicted daily refining capacity of 9.939 million barrels, BMI Research said in a May 22 report, adding that budgetary and regulatory setbacks have led to project delays and cancellations, especially in Brazil.
China's domestic demand also is being hampered by its effort to curb pollution that's caused social unrest and health problems. It's set to adopt a higher-quality specification for gasoline and diesel starting from January. That means the quality of its fuel is unlikely to be an impediment for foreign buyers.
The majority of refiners can already meet China V specifications, the equivalent of Euro V quality, according to Shen Fan, a deputy general manager at Pacific Commerce Holdings Pte Ltd, the Singapore trading unit of independent refiner Shandong Dongming Petrochemical Group.
Sinopec, Asia's biggest processor, said last year that 70 per cent of its gasoline capacity and 40 per cent of its diesel meet the standard. Traders also can typically blend lower-grade fuel with other products to meet quality specifications if required.
"The fuel surplus has increased in China, and as a result we are seeing exporters search much more aggressively for additional markets," said Victor Shum, a vice president at Englewood, Colorado-based industry consultant IHS Inc. "There will be more competition. No question about it."