China Diesel Imports Dry Up as Economy Slows

China is unlikely to import diesel for domestic use for the rest of the year due to a slowing economy, industry sources say, putting pressure on Asian diesel margins as well as potentially reversing high prices for the fuel in the West.

The drop in imports of diesel, Asia's most widely consumed fuel, is the latest example of slowing industrial activity in China feeding through to demand for resources. Consumption of iron ore, steel and copper have all fallen in recent months.

The main output of Chinese refineries is typically diesel, but China normally starts buying at this time of the year on the spot market to meet peak demand from agriculture and for power generation. This year China is still exporting.

"Usually around this time, they will at least be making enquiries to buy diesel and start snapping up volumes, but I'm not seeing that happen now," said a source at a refiner that normally supplies China, who asked not to be identified.

"The fact that they're still exporting, even though in small volumes, shows that demand is not quite there."

China's top refiner Sinopec Corp is exporting about 60,000 tonnes of diesel a month, two A sia-based traders said, after it made its first significant export in six months in June.

This is in sharp contrast to last year when Chinese refiners started making enquiries around this time and imported more than 300,000 tonnes of diesel for November and December, one of the biggest purchases of the year for domestic use.

In 2010, Sinopec also imported about 300,000 tonnes of diesel for November and December.

Purchases typically start from late September to October.

China imported 81,996 tonnes of diesel in August, a fall of 67 percent from a year ago, customs data shows. For the first eight months of the year, it imported 732,747 tonnes, down 47 percent from the same period last year

These figures do not fully reflect China's diesel imports since they also include transit barrels shipped to tax-bonded storage, which may not be destined for the Chinese market.

"Demand in China is not good at all, so it doesn't look like state-owned companies will be importing much this year," said a source at a company that imports diesel into China.

China earlier this month raised retail prices of diesel by 6.5 percent, further squeezing domestic demand, traders said.

FUEL OIL DEMAND DOWN

Lower Chinese demand is already being felt in the Asian fuel market with diesel margins at a one-week low this week, traders said.

Pressure on margins could, however, be partly offset in the fourth quarter as demand from other parts of Asia such as Vietnam picks up post-monsoon with more industrial activity and as heating oil demand rises from Europe.

Lower Chinese demand may also help ease pressure on diesel prices in the West, where the profit margin over crude has risen 30 percent in the past three months to $19.50 a barrel. LGO-LCO1=R

Demand for straight-run fuel oil, used as feedstock for China's independent or "teapot refineries", has also slowed, in a further sign that diesel demand has declined, traders said.

The main output for Chinese refineries is usually diesel. It is also the same for teapot refineries, and a lower appetite for fuel oil indicates a decline in demand for diesel, particularly for use in power generators.

A Singapore-based fuel oil trader said he had seen more shipments of fuel oil going into China. "These were fixed earlier when demand prospects were good  but the pick up rate from teapot refiners is not great," he said.

October purchases of the feedstock, currently at around 1 million tonnes, will drop from September's 1.8-2 million tonnes, according to estimates by two traders who supply to China.

CHINA EXPORTS NORMAL

September and October are typically when diesel used in the Chinese agricultural sector picks up, said Liao Na, information director of energy consultancy C1 Energy.

While she expects gasoil supply within the country to turn tighter this month, with a drop in stocks, she does not envisage the shortage to be as high as in previous years.

"Due to slowing demand, the market will move to a balanced range and there will not be a critical shortage as in previous years," she said.

Asian gasoil margins held above $19 a barrel over Dubai crude this week, well above the $16 a barrel range in the same period last year, Reuters data showed. That may indicate China's diesel exports are supporting a market squeezed by a lack of supply due to refinery closures in Australia, Japan and the United States,

"Nowadays, China exporting diesel is not a big deal, it's becoming normal and the market is used to it," said a source at a North Asian refiner.