Teapots take up the slack, but...

ONE of the big mysteries that have piqued market interest is China's enduring thirst for crude oil amid its slowing growth trend. Empirically, China's GDP growth has, since March 2011, slowed from its earlier double-digit pace, easing to 6.7 per cent in the first half of 2016. On the other hand, the Asian dragon's oil imports have remained strong, growing at a double-digit clip since the first quarter of this year.

This phenomenon was initially attributed mainly to China's healthy economic fundamentals, which translated into strong growth across a range of imports, from base metals to energy and soft commodities. This may have been true in the past decade, but over the last two years, the sudden pickup in Chinese crude oil imports in the past 15 months has been both economically and policy driven - particularly by the rise of independent Chinese oil refineries, to be specific. Following reforms in its energy sector last year, the government has allowed 27 independent refiners to import crude for the first time. These refiners - known as "teapots" - have relatively smaller refining capacities of between 20,000 and 100,000 barrels per day (bpd).

These teapot refineries have flourished. Their market share has grown substantially, with crude oil imports flowing to Qingdao port in eastern Shandong province (home to 80 per cent of all teapot refineries) surging to account for 31 per cent of total crude oil imports in the first seven months of 2016. Elsewhere, these teapots now account for a fifth of China's refining capacity.