China’s Oil Import Surge May Not Mean Economic Rebound

• Lower crude prices at the beginning of the year were a window of opportunity for Chinese refiners to stock up on cheaper crude.
• Coal imports into China, for their part, saw a record in August since at least 2015 as prices declined from last year’s highs.
• Chinese crude imports hit 12.43 million barrels per day last month, the third-highest-ever daily rate of arrivals in a month.

China imported in August record volumes of coal and the third-highest monthly amount of crude oil ever. But the recent surge in the imports of major commodities could be masking one-off temporary factors instead of a rebound in China’s economic growth in the second half of the year.

Analysts have been closely tracking the growth pace of the world’s second-biggest economy in search of clues about oil and other commodity demand.

In a disappointing first six months after the reopening from the Covid-related lockdowns, China failed to convince market participants and analysts that its economy would emerge strongly from the nearly three-year-long strict restrictions on movement. As a result, oil prices faltered in the first half of 2023, also weighed down by concerns about the world’s largest economy, with the Fed pushing U.S. interest rates higher and thought to be pushing the economy into a recession.

These lower oil prices were the window of opportunity for Chinese refiners to stock up on cheaper crude, and August’s near-record imports could be the result of the still lower prices in May and June when most of the contracting for the August arrivals was likely done, Reuters columnist Clyde Russell notes.

Coal imports into China, for their part, saw a record in August since at least 2015, as prices declined from last year’s highs and coal stepped in to offset weak Chinese hydropower output amid rising summer electricity demand.

Crude Imports Strength?

China imported in August the third-highest monthly crude oil volumes ever as crude arrivals surged by 20.9% compared to July and by 30.9% versus August last year, according to Chinese customs data.

Chinese crude imports hit 12.43 million barrels per day (bpd) last month, the third-highest ever daily rate of arrivals in a month, per Reuters estimates on data from the General Administration of Customs. Related: At What Level Will Saudi Arabia And Russia Stop Pushing Oil Prices Higher?

Crude imports soared as refiners continued to build stockpiles and raise refinery runs in order to capture higher margins exporting fuels.

China’s crude oil imports in July averaged 10.29 million bpd, a significant decrease from June’s record 12.67 million bpd imports, but still 17% higher year-over-year.

In August, refiners processed much more fuel to meet the peak summer travel demand—the first non-lockdown summer in China in three years—and to benefit from high margins outside China when exporting fuels.  

But in August, the cargoes arriving in China were contracted two to three months prior, at lower prices than the ones seen last month.

More crude oil imports and more refining processing were in response to the peak summer road fuel demand, but also a jump in China’s fuel exports.

Refined product exports rose by 23% year over year in August. This leaves cumulative refined product exports over the first eight months of the year up by almost 43% compared to the same period of 2022, according to bank ING.

China has also largely built crude stockpiles this year, accelerating the pace of inventory builds in the first half of 2023.

But as oil prices moved up closer to the $80-$85 range, Chinese refiners were estimated to have likely tapped their crude stockpiles in July as crude processing ramped up while imports slumped from the previous month.

China’s refiners usually dip into inventories while they curb purchases when crude prices rally. With estimated large stock builds from earlier this year, China could be able to afford to slow imports at prices around $90 per barrel—the Brent price in early September.

So, imports in October could be lower than previously expected, which could alert the market again to a Chinese economic slowdown. But it could be just that China will not feel the need to import near-record volumes of crude at $90 a barrel or above.

Record Coal Imports

In coal, Chinese imports in August jumped by 12.9% from July to a record in data going back to 2015. Imports also surged by 53% from August last year, according to China’s customs data.

With a significant decline in power output at China’s massive hydropower capacity due to insufficient rainfall and drought, coal production, coal imports, and coal-fired electricity generation have jumped this year.

Lower international coal prices compared to last year’s record highs, when Russian coal was banned in the West, have also played a role in the Chinese surge in imports this year.

Iron Ore Uncertainty

In the iron ore market, Chinese imports also rose in August, but uncertainty about the frail property sector is clouding the outlook, analysts say.

Iron ore imports increased by 13.8% month-on-month in August amid higher demand for steel ahead of the peak construction season. China’s imports were also up by 10.6% compared to August 2022.

“Iron ore prices surged more than 15% over the past three weeks as China has continued its efforts to boost the steel-intensive property sector. Steel mills are also expected to ramp up as the building season begins again this month,” ING commodities strategist Ewa Manthey wrote in a note last week.

“We believe that with the supply side largely stable, it will be demand in China that will continue to be the main driver for iron prices moving forward.”

By Tsvetana Paraskova for Oilprice.com

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