SIW1078“Following reports of China’s import figures for May, attention has focused on the data for crude oil imports. In January to April 2013, China imported 92mt of crude (including landborne trade), or 5.6m bpd, followed by 5.7m bpd of imports in May. In the year-to-date, imports by the major hope for crude oil trade growth are down by 2%. Is it time to plan for the worst?

Strategic Thinking

Well, maybe not. Clearly, the crude tanker markets are not in good shape, with evident oversupply, and demand weakness not helped by the effect which shale production is having on US import requirements. The freight markets remain fragile: in March, earnings levels on the eastbound routes from the Arabian Gulf dipped below $3,000/day.

Better Times

However, in the second quarter better fortunes were experienced. The VLCC spot fixture count in the Arabian Gulf during May came to a massive 162, including 123 eastbound fixtures. This compares to average eastbound cargoes of 91 per month in Q1 2013, and caused eastbound earnings to rebound to around $25,000/day in late May. The activity seen during May makes it likely that firmer import figures lie ahead.

What’s Happening?

Although the VLCC market has softened since, and fixture levels fell in June, there is a more fundamental reason not to take the weak Chinese trade growth data at face value. Early 2012, which forms the baseline for the negative year-on-year comparisons, was an extraordinary period for Chinese crude imports, well ahead of trend (see graph), with the government capitalising on conditions to acquire substantial volumes to fill Phase II of its Strategic Petroleum Reserve.

Something In Store

Relatively little is known about total Chinese storage capacity. The data on the graph has been estimated from the few figures which have in the past emerged on total Chinese stocks, both commercial and state-owned, plus the more-commonly published data on net stock changes. However, the trend is clear: the record imports of early 2012 occurred at a time of strong building of stocks. So the underlying level of imports for actual consumption remains positive.

Of course, this is partly academic as far as the VLCC market is con-cerned. Imports are cargo, whatever they are used for, and last spring there was more to go around and fewer ships. But there are causes for comfort: May fixtures show demand at levels better than before, year-on-year import growth is likely to turn positive again in 2H 2013 (imports are now heading back towards trend levels and stock build had slowed by 2H 2012), and many indicators of Chinese oil demand are improving. Furthermore, some reports suggest up to 55m bbl of additional SPR tank capacity could be completed and filled later in 2013. Now, that would be a pleasing development for the large crude tanker market. Have a nice day.