TOKYO -- With the quality of Chinese gas oil steadily improving, Japanese distributors, who have been the leading exporters of high-grade oil products in Asia, are increasingly taking note and may be forced to reconsider export strategies due to the growing presence of their new rival.
Diesel and other gas oil fuels from Chinese companies have recently become comparable to products from Japanese peers. If qualities are indeed similar, Japanese companies may lose their competitive advantage.
Japan and South Korea are very concerned about the situation, said Jiwon Chung from Oil Price Information Service, a U.S. research company. These two countries have been the main supplier of oil to Australia, and they worry that China may encroach on that market.
Following a series of oil refinery closures over the past several years, Australia has become increasingly dependent on imports of oil products. But few oil exporting countries can meet the strict environmental protection criteria set by Australia.
Gas oil products typically contain sulfur. Products with a sulfur content of as low as around 10 parts per million can be traded at high prices, said Toshinori Ito from Ito Research and Advisory. Japanese and South Korean oil companies have supplied such high-grade products. That difference in price could become smaller, according to TonenGeneral Sekiyu, a major Japanese oil distributor, if a larger amount of high-quality gas oil from China becomes available.
According to data from Rim Intelligence, a Tokyo-based oil research company, gas oil with 10ppm of sulfur was trading at around $62.55 per barrel as of Tuesday in the Singaporean market, roughly 80 cents higher than gas oil with 500ppm of sulfur. The gap has narrowed from around $1.7 a year earlier.
The improved quality of Chinese oil products is due largely to the country's tighter environmental regulations. Refineries have enhanced their capability to process sulfur content to be in compliance with revised laws.
"Our understanding is that China has already begun exporting high-grade gas oil products to Australia and other locations," said a TonenGeneral Sekiyu employee. Idemitsu Kosan, another major distributor, expressed concern that the rivalry with China is intensifying. Jiwon Chung of OPIS foresees that China's oil exports to Australia could be in full swing by next year.
In addition to quality considerations, the sheer amount of China's exports is challenging Japanese distributors. China's gas oil exports in August stood at 1.07 million tons, up 50% year-on-year. The amount has exceeded 1 million tons for six consecutive months.
China is keen to boost oil exports, partly due to falling domestic demand of truck fuel oil amid the country's slowing economy.
Asia's oil market has continued to see a supply glut. Middle-distillate inventories in Singapore, including gas oil and kerosene, are roughly 20% higher than their levels from two years ago, when China was not yet a major oil product exporter.
In Japan, the aggregate oil processing capacity of refineries is greater than domestic demand. To reduce inventories, oil distributors carefully control export volumes to Asia based on the domestic supply-demand balance. These businesses would take a hit if prices decrease overseas. If the companies slow their exports, the supply-demand balance in the Japanese oil product market could also be affected.