China's independent “teapot” refiners boosted profit margins last year buying discounted Iranian and Russian crude oil and products sanctioned by the West and shunned by other buyers.
But the shifting scope of US restrictions has bolstered prices on the market for sanctioned crudes, and that may create a more challenging environment for small refiners’ profit margins this year.
Last year, privately owned teapots remained competitive against more sophisticated state refiners and their larger independent peers.
Between January and early August 2023, the teapots’ processing profits for imported crude rose to more than 500 yuan per ton ($9.55 per barrel), as refiners ramped up imports of sanctioned crude, but dropped thereafter.
That compares with margins of less than 100 yuan/ton ($2/bbl) in 2022, said Victor Yang, a senior analyst at Shandong-based consultancy JLC.
“This year, there aren’t that many bargains anymore,” Yang added.
Customs data from Shandong province, home to at least one-half of China’s teapots, show 88% of its crude imports came from either Malaysia or Russia last year — an increase of 20 percentage points from 2022.
Iranian crude is widely said to be handed over via ship-to-ship transfers offshore Malaysia before being rebranded as Malaysian oil.
It implies that Chinese teapots relied far more on the “dark” market and “shadow fleet” of tankers than in previous years.
Surge in Imports
Shandong recorded a 47% jump in imports of Malaysian crude to 942,000 barrels per day last year, accounting for just over half of the province’s crude imports.
China imported 1.1 million b/d of Malaysian-origin crude in 2023, according to customs data.
That figure tallies with estimates from shipping data analytics company Vortexa that China imported 1.1 million b/d of Iranian crude and condensate last year, up 70% from 2022.
Shandong’s imports of Iranian crude fell in the fourth quarter amid a slump in demand from teapot refiners, due to narrowing refining margins and a shortage of import quotas, Vortexa said.
Similarly, Shandong recorded a surge in imports of Russian crude in the seven months to end-July before Moscow implemented a 500,000 b/d cut in crude output from August.
Shandong refiners doubled imports of Russian crude year on year to 717,000 b/d in 2023.
Shandong’s fuel oil imports more than quadrupled last year to 215,000 b/d, customs data show. Imports from Russia surged 518% to 113,000 b/d after the EU banned imports of Russian products from February 2023.
Imports from Malaysia, which are believed to include imports of Russian fuel oil, surged by 633% to 73,000 b/d.
Teapots previously processed fuel oil as a refining feedstock until they were authorized to start importing crude oil in 2015. The EU ban forced Russia to redirect its fuel oil exports to China and lower the price.
Uncertain Outlook
As the buyers of last resort for US-sanctioned crude from Iran, Russia and Venezuela, teapot refiners extracted deep discounts from sellers last year.
That could change if the US tightens sanctions on Iranian crude amid growing tensions in the Middle East. For now, China’s imports of Iranian crude appear to be holding steady, despite talk that Iran has sharply increased differentials for its grades.
Kpler’s preliminary data show that China imported around 1.27 million b/d of Iranian crude in January, against 1.28 million b/d in December, Kpler senior oil analyst Homayoun Falakshahi said.
Vortexa puts China’s crude imports from Iran at under 1 million b/d in January, but that may not mean teapots are less keen on Iranian crude. “Teapots used their [crude] quotas to draw oil from bonded tanks so demand for fresh arrivals is lower,” the firm’s China analyst, Emma Li, said.