China's state-controlled oil firms are warning of continued challenges to refined product sales, despite expectations of a stronger demand recovery in the second half of the year as the government seeks to revive its Covid-19-hit economy.
Chinese gasoline demand has entered a low-to-medium growth phase while diesel demand growth peaked five years ago, state-owned CNPC's think-tank ETRI said. But it expects demand for gasoline and diesel to bounce back in the second half of the year, after being hit by the coronavirus outbreak.
Any recovery in jet fuel demand is largely contingent on how well countries around the world control the pandemic, with ETRI expecting demand to remain weak for the rest of the year.
Diesel demand has received some support since April thanks to an increase in infrastructure investment, ETRI said. The northwest region of Xinjiang plans to accelerate construction of railways, reservoirs, power, urban and rural revitalization projects.
Chinese diesel demand could rise by 2.5pc from a year earlier to 3.5mn b/d in July-December, boosted by transportation and construction use. Sales of construction machinery like excavators rose by 68pc year on year in May alone, ETRI said, without providing outright numbers.
Government stimulus will support Chinese economic growth in the second half of the year and Beijing may aim for a minimum 2pc GDP growth this year. China's GDP could expand by 5.5-6pc in July-December and by 2-2.5pc for the whole year, the ETRI projected.
China's economy grew by 3.2pc in the second quarter, a strong recovery compared with a 6.8pc decline in January-March. The IMF expects China to be the only major economy to expand this year, albeit by just 1pc, as global GDP falls by 4.9pc.
Gasoline demand has increased year-on-year since June and could rise by 3.5pc from a year earlier to 3.4mn b/d in July-December, supported by higher passenger vehicle use because of continued concerns about the coronavirus. But demand is contingent on both residential and business travel needs. ETRI is optimistic that gasoline demand could be supported by short trips during upcoming holidays such as October's golden week.
The profitability of oil product sales will be squeezed as competition heats up. Independent refiners ramped up runs in the second quarter as refining margins improved after the government imposed a floor price when crude is below $40/bl. Average run rates at independent refineries between late March and early June were likely as high as 70pc, around 10 percentage points higher than a year earlier, ETRI said. But runs will be pressured moving forward as rising crude prices increase feedstock costs.
The ETRI also expects more market reforms this year, as signalled by the commerce ministry's (MoC) announcement in early July to remove entry barriers to crude and product markets. New entrants will be able to enter wholesale, retail and storage businesses more easily, with fewer administrative hurdles. Applicants previously needed approval from the MoC. Beijing switched retail licensing approvals from the MoC to local governments last year.
More reform announcements are expected this year, covering the upstream, midstream and downstream sectors, an official at a state-controlled firm said.
But most of China's lucrative retail locations have already been taken up. PetroChina and Sinopec together control more than 50pc of China's over 100,000 retail gas stations.
