China hits rocky road over diesel demand

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In China’s southern city of Chongqing, a crematorium has been unable to fire its furnaces because of a lack of diesel, leaving 10 corpses to go uncremated.

The gory tale, which made headlines in the local press, vividly highlights the shortages of diesel sweeping across China as industries turn on their electricity generators for the first time in five years to bridge a gap in power supply.

The Chinese government is rationing electricity supply as it rushes to meet ambitious energy and environmental targets by the year’s end, hence boosting demand for diesel, power generators and even candles as the country scrambles for extra power.

“The primary reason for the diesel shortage is that they cut power supply to a lot of industries,” KF Yan, research director at consultancy Cera in Beijing, says.

China’s diesel, or gasoil, demand is widely expected to ease by the end of the year, as the rush to meet the annual energy target recedes.

But even so the shortages are reverberating through the global oil market now.

Traders are profiting, shipping diesel into China.

At the same time, refineries, after a tough year, are enjoying a rare boom as analysts say that European diesel cracks – the price spread between diesel and crude oil – will be supported by the shortfalls in China.

The International Energy Agency, the western countries’ oil watchdog, says that Chinese oil consumption growth, already strong, “could well surge sharply again in the fourth quarter as manufacturers in coastal areas turn to small gasoil-fired electricity generators amid government mandated closures of coal-fired plants.”

The IEA estimates the surge in diesel demand will add about 70,000 barrels a day to the country’s oil consumption from October to February – equal to about 8.5 per cent of the country’s total oil demand growth forecast of 818,000 b/d in 2010.

Gasoil prices in Europe, the industry benchmark, surged last week above $750 per tonne for the first time since October 2008, up nearly 20 per cent since the beginning of the year.

A similar phenomenon occurred in 2004 when power outages forced companies to rely on power generators, triggering a surge in China’s oil demand growth. Today’s cuts are because of government policy however, not a shortage of electricity supply.

China is the world’s largest consumer of energy, according to the IEA, and the government has vowed to reduce energy consumption per unit of GDP by 20 per cent from 2005 levels by the end of this year.

That goal has proved challenging, particularly after the government stimulus in 2008 and 2009 boosted energy-guzzling industries such as steel and cement.

The diesel shortage that began late last month is one of the most tangible signals yet of the impact of the energy cuts.

China’s refineries have been ramping up production to meet diesel demand, with Sinopec reporting a company refining record in October.

According to China Oil, Gas and Petrochemicals, an industry publication, CNPC and Sinopec have been selling diesel reserves since June to meet the surge in demand.

“We noticed the diesel markets becoming tight in late summer,” said an industry executive in Beijing who declined to be named because of company policy.

The market for diesel-powered generators has been hot as well, owing to the power cuts. A vendor in Jiangsu province said that prices had gone up 15 per cent for a 20KW Cummins diesel generator. Prices for a larger 1,000KW generator were up by about 10 per cent, said the vendor at Jiangsu Wuxi Shengxin Tech company.

A robust black market in diesel has sprung up in response to the shortages and the surge in demand from power generators, with the fuel selling for more than 1.5 times the legal price in southern China.

The country’s retail diesel prices are closely controlled by the government, which has been slow to raise prices because of inflationary fears. As a result some businesses and traders are holding on to their diesel stocks and waiting for prices to rise.

The last official price increase was on October 26, and, according to one industry observer, hoarding began at least two weeks beforehand as wholesalers waited for the new price to be announced.

Additional reporting by Zhao Xue in Beijing and Javier Blas in London

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