China's worst power crunch not stoking fuel imports

China is not stepping up imports of fuel oil or diesel despite suffering its worst-ever power shortage, unless the government raises electricity tariffs or oil prices fall sharply, traders said on Thursday.

A rush for individual generators and diesel helped push up global oil markets during China's biggest previous power crisis in 2004. But Chinese trade sources did not expect the same to happen this time due to high fuel prices, while diesel stocks remain abundant.

The country's price-sensitive utilities have gradually slashed imports of utility-grade fuel oil, once the largest imported oil product by volume, over the past two years on surging oil prices and increasing domestic refining capacity.

"I haven't seen any improvement in enquiries for cracked Chinese-specification fuel oil despite the power shortages and I don't expect any," a Huangpu-based fuel oil trader said.

"Demand is as quiet as it has been in the past year. In fact, no one even talks about the grade any more these days."

Traders said the power shortages are mainly because utilities are running at reduced levels due to poor margins as electricity rates remain low.

Despite the recent fall in fuel oil prices, that has seen the benchmark grade falling by more than $70 a tonne over the past 12 trading sessions, levels are still too high, traders said.

State-controlled electricity tariffs have not risen in line with spiralling global oil prices that have jumped above $100 early this month before retreating below $88 .

The benchmark grade averaged at $376.70 a tonne last year, up 22 percent from a year ago, while January average prices were even higher at $479.30 a tonne, as of Wednesday.

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Rising refining capacity, leading to the production of more domestic fuel oil, and increasing generation capacity using alternatives such as hydropower and coal, prices of which are also rising, have also curbed imports.

Imports into the southern port of Huangpu, the main inlet for utility-grade fuel oil, have been on a downtrend for the past three years, falling to about 900,000 tonnes a month this year from 1.3 million tonnes in 2004.

Imports from Singapore, which once accounted for most of China's imported fuel oil, have also fallen significantly, from about 510,000 tonnes a month in 2005 to 317,000 tonnes last year. Most of China's fuel oil imports, averaging 1.85 million tonnes a month for 2007, are the grades used as refinery feedstocks.

Power shortages in Guangdong, Guizhou, Yunnan, Hubei, Chongqing and Shanxi, have also not pushed state refiners to import diesel again, as stocks are high and use of the fuel for transport has been low due to winter, Chinese oil industry sources said.

Traders said there had not been any demand spike for industrial-grade diesel, used for private power-generation at factories and homes, after a three-month spell that saw massive imports totalling 140,000 barrels per day to top up thinning stocks. The lull has also come ahead of the long Lunar New Year holidays in early February.

"China diesel inventory is so high because of the heavy imports. Chinese refinery run rates are still stable, so we don't see any impact at the moment," a diesel trader said.