Checkpoint Asia

China’s (and Asia’s) Biggest Refiner Hit Hard by Iran Sanctions

Sinopec to reduce operations after skyrocketing freight rates erode margins

Editor’s note: For background see: Shipping Crude to Asia Has Never Been More Expensive, US Sanctions to Blame — US sanctions have taken 300 tankers, 3% of the global fleet, off trading markets


China’s biggest refiner plans to reduce operations from next month after a surge in the cost of shipping crude eroded margins, according to people with knowledge of the matter.

Freight rates have skyrocketed since the U.S. announced sanctions on Chinese shipowners in late-September, triggering a flight from vessels owned by affected companies and a bidding war for alternative tankers. That’s driven up the cost of importing crude and is cutting into the profits made from refining.

Sinopec Corp. is looking to start cutting run rates from November, according to the people, who asked not to be identified as information is private. The company could reduce total processing by one million tons of oil in December, the equivalent of about 5% of the company’s refining, according to one of the people. An external spokesperson for the company declined to comment.

The decision by Sinopec — China’s top refiner by capacity — comes at a time when Asian processors would typically be increasing run rates to cope with higher fuel demand from winter and holiday consumption. The surge in oil-procurement costs has far outweighed an expected boost in margins toward the end of 2019 due to cleaner ship-fuel rules that take effect on Jan. 1.

“Such a dramatic surge in freight rates is unprecedented,” said Li Li, an analyst at Shanghai-based commodities researcher ICIS-China. “It’s something that most market observers have never seen before, and it’s leading to widespread panic.”

The cost of chartering a supertanker from the Arabian Gulf to China surged fivefold since late-September, according to Baltic Exchange data, as sanctions on units of companies including COSCO Shipping Energy Transportation Co. prompted cancellations and replacements. Booking a tanker for the West Africa to China route rose to $10 a barrel — which adds almost 20% to the price of oil — from about $2.50 before the sanctions.

Sinopec, which operates complex refineries along China’s coast, the Yangtze River and in North China, imports oil from all the major producing regions. Higher freight rates are set to have a bigger impact on longer-haul shipments.

The rising transport costs may prompt refiners to tap existing inventories as they reduce spot purchases. Indian Oil Corp. has been forced to reduce spot imports, while Hindustan Petroleum Corp. has raised concerns about the impact of shipping rates on the company’s procurement plans and profits.

“The decision by Sinopec could contribute some bullishness to the Asian fuels and oil-products market,” ICIS-China’s Li said. “Particularly if more refiners across the region follow suit.”

Source: Bloomberg