Singapore (Platts)--26Apr2013/540 am EDT/940 GMT

China's gasoil shipments may rise further this year after nine straight months of net exports, as more refining capacity comes online and domestic demand growth weakens, likely exacerbating the glut in Asia where consumption has also slowed, analysts said this week.

To ease the oversupply, traders are moving large volumes of cargoes to meet demand in the Red Sea region, offering some support to the Asian market, traders said.

"[Diesel exports] should continue to rise going forward as refinery capacity grows faster than product demand," Citi Research said in a report last week, adding that Chinese refiners have a strong incentive to export products at world prices as domestic prices are capped to offer consumers affordable fuel.

They also have greater incentive to raise refining rates following China's oil product price reforms announced late March, which would help boost margins.

Asia's top oil consumer has traditionally been balanced in gasoil but became a steady net exporter in the second half of 2012, as demand for the fuel softened along with slowing economic growth.

Total net gasoil exports last year were 1.85 million mt, versus net imports of 410,000 mt in 2011.

Net gasoil exports hit their highest level in three years last month at 400,000 mt, with exports at 420,000 mt and imports at 20,000 mt, customs data showed. This brought first quarter net exports to 910,000 mt, versus net imports of 60,000 mt during the same period in 2012.

The outflows are largely because significant new refining capacity came on stream late last year, said Sushant Gupta, regional downstream analyst at Wood Mackenzie, who estimates that more than 1 million b/d of new capacity in China was added in 2012.

Beijing-based energy consultancy 3E believes incremental capacity in 2012 was 1.25 million b/d and Bernstein Research estimates refiners will add some 1.2 million b/d of capacity this year.

These include two greenfield refineries: PetroChina's 200,000 b/d Pengzhou facility in Sichuan province and trader Sinochem's first wholly owned 240,000 b/d Quanzhou plant in Fujian province.

"What we are seeing [in the increased exports] is a demand response rather than from the supply side," said Gupta, adding that he expects total net gasoil exports this year to be slightly higher than in 2012.

China's apparent demand for gasoil edged up just 1.2% year on year to about 3.48 million b/d in 2012, Platts calculations show, largely due to sluggish industrial and manufacturing sectors. Apparent demand growth in the first quarter of 2013 slowed to 0.4% year on year to 3.55 million b/d.

But barring any economic disaster, Wood Mackenzie expects gasoil demand growth to rebound to 4.7% this year, and 6% in 2014. It expects China to be a deficit gasoil market over 2015-2016, due to improving demand, which should tip China back into a small net importer then, Gupta said.

ADDS TO REGIONAL GLUT AS DEMAND ELSEWHERE WANES

China's rising exports were adding to regional oversupply as major gasoil importers, Indonesia and Vietnam, were facing declining demand over the last two quarters, versus the year-ago period.

"Many did not expect Chinese exports to be so high," a Singapore-based trader said. "It is dragging us down."

Indonesia's Q2 term gasoil requirements have fallen by a third, as the country's economic growth was expected to slow, hit by flooding in the capital in January, a mining sector slowdown and fuel substitution to natural gas.

State-owned Pertamina is expected to import 2 million to 3 million barrels of 0.35% sulfur gasoil each month over April-June, down from the estimated 3 million-4 million barrels/month in Q1, Platts previously reported.

Softer Q1 demand also prompted Pertamina to defer taking delivery of term gasoil cargoes -- up to 1.8 million barrels have been pushed to April -- resulting in no additional spot imports for next month, said a source with knowledge of the matter.

China's exports to Indonesia have tapered off from a 15-month high of 69,000 mt last September to 700 mt last month.

Gasoil demand has also been low in the last two quarters in Vietnam, where the economy is growing at a slower pace, leading to brimming storage tanks, said industry sources.

Vietnam's top oil products importer Petrolimex last issued a tender seeking 35,000 mt of 500 ppm sulfur gasoil for May 20-31 loading. Before this, Petrolimex bought only 201,000 mt of 500 ppm sulfur gasoil from the international spot market so far this year.

In contrast, Petrolimex bought up to 461,000 mt of gasoil in the first half of 2012 to cover for supply cuts at the country's only refinery.

RISING ARBITRAGE VOLUMES TO MIDDLE EAST

Offering some relief, China's gasoil cargoes have found another outlet -- Singapore and the Middle East. January exports to the city state totaled 186,000 mt, accounting for nearly half of China's exports and contrasting sharply with 33,000 mt that moved to Singapore in the same period last year.

Higher gasoil demand in the Red Sea-Persian Gulf region this year has made Singapore a prime source for supplies, as the island-state also has surplus cargoes arriving from South Korea, Japan and Taiwan, traders said.

Meanwhile, demand for medium sulfur gasoil in the Middle East is expected to pick up over summer as air-conditioning use increases, sources said.

"The weather will start getting very hot in May-June ... demand is usually strong from May to September," another trader said.

Unit: million mt Source: Platts

--Song Yen Ling, yen_ling_song@platts.com

--Jonathan Nonis, jonathan_nonis@platts.com

--Deborah Lee, deborah_lee@platts.com

--Edited by Geetha Narayanasamy, geetha_narayanasamy@platts.com

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