TheChek News Flow

China Has Refined Taste for Oil

Crude-oil investors have reasons to like China these days. Oil refiners aren’t so enamored.

According to trade data out Saturday, the world’s second largest consumer of oil after the U.S. imported 18% more crude in October from the year before, faster than its 9% growth so far this year. As crude gets cheaper, China is on the bargain hunt.

The trading arms of its state-run oil majors have snapped up cargoes in international markets in recent weeks, and these will likely register in even higher import levels the coming months. Oil bulls can take some consolation that these purchases prevent the crude price from falling faster.

Yet even as China imported more crude, its refineries were converting it into diesel or fuel oil for re-export. Its net exports of refined oil products swelled to a record high in October, almost twice the level of the previous monthly record in July, says Citigroup ’s Ivan Szpakowski.

Some of these exports can be chalked up to an industrial slowdown in China that has suppressed demand for diesel. Still, overall oil consumption hasn’t been so bad this autumn. Government stimulus helped it rise 7% year-over-year to a seven-month high in September, according to London-based consultants at Energy Aspects.

The bigger problem is that China has built more refineries than it needs. These processed 9% more volume in September than the year before, faster than consumption growth. Though its state oil giants have somewhat curbed their expansion plans, eight refineries have added or will add capacity this year, with three more next year, notes Mr. Szpakowski.

This overcapacity is getting pushed onto the rest of Asia, just like in other commodities like steel. That’s hurt refiners especially nearby China, such as South Korea’s S-Oil and SK-Innovation. And there’s likely more pain, as refining margins temporarily buffeted by cheaper crude get competed away.

Though China is inflicting pain on the products market, crude-oil bulls should also be worried. If the country cuts its refining capacity down the road, it won’t need that much crude. And while some of the imported crude may get gobbled up by China’s strategic petroleum reserve, there are constraints there, too.

The world’s engine of oil-demand growth is buying crude more to satisfy its refinery complex than its underlying consumers and businesses. There’s not much solace in that.

Asian Market Update: Shanghai, Hong Kong rally on confirmation of trading link; China inflation and trade figures remain soft

***Economic Data*** - (CN) CHINA OCT TRADE BALANCE: $45.4B V $42.0BE; Exports Y/Y: 11.6% v 10.6%e; Imports Y/Y: 4.6% v 5.0%e - (CN) CHINA OCT CPI Y/Y: 1.6% V 1.6%E (matches lowest level since Jan 2010) - (CN) CHINA OCT PPI Y/Y: -2.2% V -2.0%E (32nd straight month of decline) - (AU) AUSTRALIA SEPT HOME LOANS M/M: -0.7% (2nd straight decline) V -0.4%E; INVESTMENT LENDING: 3.7% V 0.7% PRIOR; OWNER-OCCUPIED LOAN VALUE: +1.4% V -1.9% PRIOR - (JP) JAPAN OCT OFFICIAL RESERVE ASSETS: $1.27T V $1.26T PRIOR

***Index Snapshot (as of 02:30 GMT)*** - Nikkei225 -0.7%, S&P/ASX -0.6%, Kospi +1.1%, Shanghai Composite +1.2%, Hang Seng +1.7%, Dec S&P500 +0.1% at 2,027

***Commodities/Fixed Income*** - Dec gold +0.2% at $1,172, Dec crude oil +0.4% at $78.96/brl - (JP) BOJ offers to buy ¥550B in 1-3yr JGB, ¥550B in 3-5yr JGB and ¥400B in 5-10yr JGB - (KR) South Korea to sell 5-yr govt bond, avg yield 2.305% - USD/CNY: (CN) PBoC sets yuan mid point at 6.1377 v 6.1602 prior setting (strongest Yuan setting since Mar 19th; biggest increase since Jun 2010)

***Market Focal Points/Key Themes/FX*** - Shanghai Composite hit fresh 32-month highs above 2,455, while Hang Seng is within striking distance of 2-month highs near 24K as the delayed stock-trading link between the two was finally announced to come online next week. Hong Kong Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) officially jointly stating that the launch of Shanghai-Hong Kong Stock Connect on 17 November 2014 has been approved. This follows a high-profile delay in the link that had been attributed in part to the Occupy Central related disruptions. UBS estimates the Shanghai-Hong Kong connect trading would open as much as $2T of stocks for trading to global investors.

- China also released a set of economic figures over the weekend. October 1.6% CPI matched the lowest level since Jan 2010, as Food component rose 2.5% and non-food up 1.2%. YTD, CPI was unchanged from prior month just above the 2% level. PPI decline of 2.2% - 32nd consecutive decline - has been attributed to global oil price drop and overcapacity. Trade figures released over the weekend marked a beat on the surplus and exports side, but growth in the imports component was less than expected. Subsequent report from BoCom reflected that "trade surplus was driven by the contraction in growth of imports, domestic demand remains weak, and de-stocking this year has led to decline in consumption of cement, coal, iron ore and other raw materials."

- The start of the APEC summit was marked by the China Pres Xi address who stated that while the economy shifted to a slower, more stable rate of growth, economic risks are "not that scary". Xi remained optimistic that "for the Asia-Pacific and the world at large, China's development will generate huge opportunities and benefits and hold lasting and infinite promise." In addition, Xi and Japan PM Abe held the first summit between China-Japan leaders in nearly 3 years, agreeing to set up a "crisis management" mechanism to prevent escalation of tensions related to disputed Senkaku/Diaoyu islands. Previously, China did not formally acknowledge the dispute exists.

- Overextended USD longs remain under pressure in the wake of slightly disappointing NFPs on Friday. USD/JPY briefly tested the downside below 114, EUR/USD is up another 30pips at 1.2480, AUD/USD is up about 50pips around 0.8680, and NZD/USD up 50pips above 0.7790. Gold remains bid above 1,170 after rising by its biggest margin since June 18th on Friday.

***Equities*** US markets: - BRK.B: Reports Q3 Net EPS attributable to shareholders (Class A shares) $2,811 v 3,074 y/y; R$51.2Bv $46.5B y/y - T: To Acquire Mexico Wireless Provider Iusacell for $2.5B - RIG: Reports Q3 $0.96 (adj) v $0.77e, R$2.27B v $2.21Be

Notable movers by sector: - Financials: Cedar Woods Properties CWP.AU +2.5% (reaffirms FY15 guidance); Minsheng Bank 600016.CN +3.6% (announces employee stock incentive plan); Haitong Securities 6837.HK +2.1%, HK Exchange 388.HK +4.7% (Shanghai-Hong Kong connect trading to start on Nov 17th) - Materials: Yancoal Australia YAL.AU -25.0% (announces $2.3B capital raising); Lynas Corp LYC.AU +8.2% (issues operating performance update) - Technology: Kingsoft 3888.HK +2.9% (Q3 results) - Telecom: NTT 9432.JP -5.0% (H1 results; cuts guidance)