* “Teapot” run rate seen at 57% end-March vs 45% last week - analyst
* Fuel demand recovering along with economic activity
* State refiners maintain production cuts
* Fuel pricing scheme provides buffer for margins
By Chen Aizhu and Shu Zhang
SINGAPORE, March 11 (Reuters) - China’s independent oil refiners are cranking up production as local governments begin to relax strict measures to contain the coronavirus and fuel demand begins to recover.
A sharp plunge in crude oil markets triggered by the erupting Saudi-Russia price war has also boosted profit margins.
Also known as ‘teapots,’ the mainly Shandong-based plants account for a fifth of China’s total oil imports.
They are forecast to operate at 57% of their capacities by end-March, up from 45% last week, according to a survey of 44 plants by Chinese consultancy JLC Network Technology.
“With further recovery in economic activities across the nation, demand for refined fuel and petrochemicals are on the steady rise, helping independent plants’ product sales,” said Shi Linlin, Shandong-based senior analyst with JLC.
About a dozen plants in Shandong, including facilities run by state-run ChemChina, are resuming or will hike run rates after steep throughput cuts in February, when the rapid spread of the coronavirus and restrictions on transportation and travel stalled economic activity and fuel sales.
As new cases subside, more parts of the country which had been in lockdown are being allowed to resume work, though travel curbs are still in place in some areas.
The refiners have also increased their oil purchases, scooping up bargain-priced crude following the surprise OPEC+ deal collapse that unleashed an oil price war between Saudi Arabia and Russia, the world’s top two exporters.
Spot premiums for Russia’s May-loading ESPO Blend crude oil, popular among teapots, fell to the lowest this week since exports of the grade began in 2010.
“In China prices for refined products are improving and some demand is coming back. So people are buying cargoes for arrival in May and June,” said a Singapore-based crude oil trader.
All major state and private refiners have asked for May-loading crude cargoes, said a Geneva-based oil trader.
Some refiners holding long-term supply contracts also stepped up purchases from Saudi Arabia and other Middle East producers for loading in April, after the sellers slashed prices to vie for market share.
Refiners were also encouraged by a domestic fuel pricing scheme in place since 2016 that puts a floor under retail fuel prices whenever the global crude oil market goes under $40 a barrel.
“We’re raising production because of this floor-price system,” said an executive with a Shandong-based refiner.
Northeast China-based Hengli Petrochemical, one of China’s largest private refiners with daily processing capacity of 400,000 barrels, is restoring throughput to 100% this month, up from last month’s 90%, said a company spokesman.
State-run refineries, however, remain more cautious, with several main coastal plants operated by top state refiner Sinopec Corp maintaining 20%-30% cuts in throughput versus levels in January, refinery officials told Reuters.
“Our biggest headache is jet fuel...there is no outlet for that. We have no choice but to keep runs low as tanks are near full,” said a senior Sinopec official based in south China.
PetroChina, the second-largest state refiner, is expected to operate at an average of 65% capacity in March, largely flat from February levels and down from just over 80% in January.
“Demand is clawing back, but only slowly,” said a company executive.
Reporting by Chen Aizhu and Shu Zhang; Additional reporting by Muyu Xu in Beijing and Jessica Jaganathan in Singapore; Editing by Kim Coghill