China’s recent push to clean up its air is leaving some of its neighbors feeling threatened.
The Asian country’s road to cleaner air has been gradual, with lead-free gasoline only becoming a requirement in 2000, almost three decades behind the U.S. This month, China imposed new curbs on the amount of sulfur in vehicle fuels to about a fifth of the previous standard, putting it on par with Europe, which has the world’s strictest emissions controls.
While the change helps China battle the smog that’s choking residents from Beijing to Xian, many of its refiners still produce the dirtier fuel. That’s causing concern in both South Korea and Japan that China will boost exports of low-quality diesel to markets such as Indonesia and Malaysia, where standards are laxer. Both depend on southeast Asia as a key customer for their diesel.
“Competition will surely heat up next year and we will have to fight to maintain market share,” Kim Wookyung, a spokeswoman at SK Innovation Co., South Korea’s biggest refiner, said in a telephone interview.
Already, China has been aggressively selling refined fuel in the region. In September, its diesel exports jumped more than 50 percent to a record, while its sales to the Philippines soared more than six-fold in 2016 through November to about 17 million barrels, according to Bloomberg calculations based on data from China’s General Administration of Customs.
With the decision to cut sulfur levels, there’s “no doubt China’s upgrade to cleaner fuels will be an accelerating factor for China to ship dirty fuel,” said Wu Kang, a Beijing-based analyst with industry consultant FGE.
South Korea Slump
Meanwhile, South Korea’s southeast Asian sales of diesel, its most-exported fuel, has slumped to its lowest level in six years. Oil-product exports from the country fell 2 percent in the quarter ended in September as shipments to the Philippines, for example, dropped 33 percent in 2016 from the previous year.
Japan’s supply to southeast Asia is poised to be the worst in a decade. The country’s exports of gasoil to the region slid about 15 percent between January and November to 25,580 barrels a day, on course for its lowest annual volume since 2006.
The end result: China is likely to overtake South Korea as the region’s top diesel exporter by 2020, according to Peter Lee, a Singapore-based analyst at BMI Research.
Refiners have also been suffering from lower margins. The profit from turning benchmark Dubai crude into oil products in Singapore averaged less than $5.50 a barrel last year, compared with $7.72 in 2015, according to data compiled by Bloomberg.
Not all of China’s neighbors are concerned. India, the fastest-growing oil consuming nation globally, has been reducing diesel exports in order to meet its own needs, with oil demand there forecast to double through 2040 to 10.3 million barrels a day.
“There’s not much of a threat to Indian refineries because we are self-consuming,” said H. Kumar, managing director of state-run Mangalore Refinery & Petrochemicals Ltd. “But if there’s plenty of diesel coming into the market because of Chinese dumping, that can impact the margins for all refiners.”
Shares in Mangalore Refinery & Petrochemicals have surged about 67 percent over the past 12 months, while China Petroleum and Chemical Corp., also known as Sinopec, has jumped 39 percent. That compares with a 23 percent gain for SK Innovation, and a 30 percent increase for Tokyo-based refiner TonenGeneral Sekiyu K.K.
State-owned oil majors PetroChina Co. and Sinopec have been investing heavily in facility upgrades to enable the production of higher-quality fuels, and they are now capable of meeting the new standard, said Amy Sun, analyst with Shanghai-based commodities researcher ICIS-China.
That also increases the risk low-sulfur fuel could flow into Japan from China, leading to more competition there as well.
“The quality of oil products exported from the county has improved to a level similar to those shipped from Japan,” said Kosuke Kai, a spokesman at TonenGeneral Sekiyu. “We expect competition in Asian oil-product markets will intensify.”