HONG KONG
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Whilst Chinese crude is locationally advantageous it is still expensive relative to Mideast crudes. China does not make a practice of selling at a discount but, instead, pitches its prices towards the upper end of the price range, grade for grade, It must therefore be asked whether Hong Kong as a market for Chinese crude oil could be expected to command favoured treatment.
At least in the medium term, the freighting advantage of the short Faul to Hong Kong from nearer Chinese ports compared with the long haul from the Mideast is largely illusory because:
(a)
(b)
The international oil freight market is depressed and therefore favourable to the shipper.
Chinese loading port restrictions militate against use of the larger more economically sized vessels.
Refinery Capacity
The large differentials between light/middle distillates and fuel oils, combined with the surfeit of distillation capacity worldwide tend to make straight run distillation refineries relatively difficult to remunerate. Thus, for the reasons mentioned above, a refinery configuration custom designed to process crude to meet the peculiar Hong Kong demand, barrel for barrel, is liable to have limited commercial attraction.
A more complex refinery, containing yield shift capacity (and thus able to convert a proportion of the fuel oil to the higher priced middle and/or light distillates) would process more crude than was strictly necessary for the home market and its exportable surpluses would be more valuable but also expensive to produce, mainly because they would be produced in a new, high cost, refinery whereas market competition would be emanating from existing, written down plant.
A new refinery in Hong Kong could be used to supply Japan with a proportion of the products she currently produces in her own refineries from crude supplied by China. In the longer term the Japanese would find this unattractive and would set out to find alternatives. Conversely, China might see attractions in adding value to its crude oil exports to Japan, provided that it enjoyed some benefit from that added value.
A Hong Kong refinery might also be scaled to meet some (unspecified) proportion of the inland petroleum products demand of China itself. Such a proposition could, conceivably, be a prerequisite for the long term supply of crude. It is impossible at this stage to say whether the economics are likely to improve without knowing whether the main additional demand would be in terms of fuel oil or
distillates.