China's Crude Imports Robust, Details are Not

If you were looking for a bright spot in China's dismal trade numbers for August, your eyes may be tempted to focus on crude oil imports.

A total of 26.59 million tonnes, equivalent to 6.26 million barrels per day (bpd) were imported, according to customs data.

While this was a 13.4-percent drop from July's 30.71 million tonnes, it's worth bearing in mind that July was the record high in terms of tonnes and some pullback was always likely. August's imports were up 5.6 percent from the same month last year.

What's more important is that crude imports are up 9.8 percent in the first eight months of the year compared to the same period in 2014, at 220.67 million tonnes, or about 6.63 million bpd.

A gain of almost 10 percent looks quite healthy, when viewed against other major commodity imports, with iron ore down 0.2 percent in the first eight months, coal a massive 31.3 percent drop and unwrought copper 8.1 percent lower.

While the decline in coal imports can be blamed on a combination of tighter quality standards, better availability of domestic coal and switching to other forms of power generation, the weakness in copper and iron is largely viewed as a direct reflection of the loss of growth momentum in the Chinese economy.

In this context it may appear somewhat surprising that crude imports appear so robust, but looks can be deceiving.

It's no secret that China has been filling strategic and commercial stockpiles, and furthermore the nation's refiners have been ramping up exports of refined products.

Taken together and it appears that almost half of the growth in crude imports has either gone into storage or been exported as fuels.

In the first eight months of 2015 crude imports have been about 593,300 bpd higher than over the same period last year.

While China doesn't disclose the amount going into strategic storage, a figure can be derived by looking at the difference between refinery throughput, net product exports and the overall availability of crude from both imports and domestic production.

In the first seven months of the year this was about 109 million barrels, according to Reuters calculations, or about 514,000 bpd.

At the same time last year, that implied surplus for storage was about 65 million barrels, or about 307,000 bpd, leaving a difference of about an extra 207,000 bpd for the first seven months of 2015.

If this amount is deducted from the growth in imports of 593,300 bpd, it leaves actual growth in demand for consumption at 386,300 bpd.

From this figure, the increase in exports should be subtracted as well, as this represents crude that is imported, processed and shipped out.

Product exports were 628,000 bpd in the first eight months of 2015, about 53,400 bpd higher than for the same period last year.

This leaves the increase in consumption demand inside China at 332,900 bpd.

This means that the growth in crude imports that is actually being used to power the Chinese economy is somewhat less impressive than the overall growth in crude imports.

GASOLINE OUTPERFORMS DIESEL
Looking at implied demand growth by type of fuel, and it's clear that the bright spot is in gasoline, which rose 17 percent in the first seven months of the year over the same period in 2014.

This does fit the narrative of increasing car use by Chinese drivers, even though vehicle sales are expected to rise a modest 3 percent for 2015 as a whole.

The weakness in fuel consumption is mainly in diesel, which is mostly used in industry, construction and transporting goods.

Again this dovetails with the view that China's export-led manufacturing sector is doing it tough, as is residential construction.

But what is important for oil markets isn't what the Chinese are doing with the oil, it matters more how much they actually are buying.

On this basis, Chinese import demand is likely to remain healthy as more strategic storage tanks are filled and more refiners outside the two state-controlled majors, Sinopec and PetroChina (PCCYF), are allowed to directly import their own crude.

China is likely to continue to provide some support to global oil markets, although by itself it's unlikely to cause a price rally.

Perhaps the more relevant thought is, how low would the crude price go if the Chinese weren't buying for stockpiles?

By Clyde Russell