China’s appetite for Russian power is dwindling due to cost overruns,

As Russia invades Ukraine, all eyes are on China – the world’s second-largest economy – waiting to see if it will provide diplomatic or economic support to its northern neighbor and “strategic partner”.

About three months later, there was no sign of direct diplomatic support from China, but no condemnation of the Russian aggression that many Western politicians had hoped for.

On the other hand, the latest trade figures between the two countries show that Beijing is ignoring Western pressure to close Russia’s economic lifeline. In April, China’s monthly imports from Russia reached a record high of 8 8.89 billion, up 56.6 percent from a year earlier and 13.3 percent higher than in March.

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But the real picture is probably even worse. Instead of China increasing its purchases of Russian goods, rising commodity prices could provide an alternative explanation, especially since a severe coronavirus lockdown has hit China’s richest regions in the past two months, stifling the economy and stifling demand, experts say.

Chinese officials say normal trade with Russia will continue despite Western sanctions. But for Chinese importers, a necessary calculation is whether the discounted Russian goods, which have been avoided by many other countries, are cheap enough to compensate for the risk and uncertainty of the possibility of payment, shipping and secondary sanctions.

At present, about 80 percent of Chinese imports of Russian products are minerals, and more than 70 percent of crude oil imported minerals, according to Post Calculations based on Chinese customs statistics.

This means that any fluctuations in crude prices in the global market will significantly change China’s total Russian imports.

Post The calculations further indicate that the average import price of crude oil in April was 70.3 percent higher than the same period in 2021. And the price of Russian crude oil has also risen by 50.9 percent year on year.

In March, Chinese imports from Russia increased by 26.39 percent over the same period last year, while in US dollars, crude imports increased by 29.93 percent year-on-year. And in April, the figures were 56.6 and 59.01 percent, respectively.

Since the war began in late February, China has been widely expected to soak up Russia’s crude oil, especially as Western sanctions escalate, with the United States and Britain announcing sanctions on Russian oil imports and the European Union announcing plans to end them this week. Its dependence on Russian fossil fuels at five-year intervals.

But volume trade statistics tell a different story. In March, despite rising import prices, Russian crude imports fell 14.12 percent year-on-year, equivalent to a 14 percent drop in total crude imports from China in the same month.

Michelle Maiden, director of Oxford’s China Energy Program, said: “The sanctions … reduce the supply of Russian oil and gas to the world market in order to reduce Russia’s revenue, which puts pressure on the global market and raises prices.” Institute for Energy Studies.

“But there are agreements and things that mean not all buyers can stop buying Russian oil and gas. Even with less flows from Russia, at higher prices, Russian revenues are still higher and potentially higher than before.”

Although arrivals from Russia to China increased by 18 percent in March, month-on-month, they were probably traded long before the Russian invasion and they reflected expectations of strong internal activity in China after the lunar New Year’s relaxation and before the current coronavirus – S&P Global Market Intelligence Director Yen Ling Song says, related lockdown.

In April, the amount of Russian crude oil in China increased by 2.6 percent month-on-month, compared with a 6.6 percent increase from all sources.

Zhao Daojiang, a professor at Peking’s School of International Studies, said shrinking Chinese demand due to increased tight lockdowns in Shanghai and many other places across the country was “the single most decisive factor affecting the purchases of Chinese oil companies abroad.” University.

“With Shanghai on the coveted lockdown, demand in the Chinese market for petroleum use is weaker than usual,” Zhao said.

Before the war began, China increased its crude purchases from Russia, and because of its geographical proximity, the country became a popular source for small independent refineries, which reduced transportation costs.

In 2021, 72 percent of Chinese crude oil was purchased from abroad, and about 79.6 million tons, or 15.5 percent of all crude imports, were from Russia – the second largest supplier after Saudi Arabia.

Most of the Russian crude oil flowing into China consists of an ESPO blend from the Far Eastern port of Kozmino, and last year about 80 percent of the marine ESPO blend shipments were shipped to Shandong, suggesting that most went to independent refiners, S & P’s Song said.

“In recent months, we’ve seen this decline by 70 percent or slightly less, and this is partly due to a reduction in demand for individual filters as well as a reduction in their refineries in response to other problems related to the Covid-19 system,” he said.

Although Western sanctions on Russia have not yet expanded its energy exports to other countries, most Chinese buyers are working more cautiously with Russia on energy trade or investment, cutting off purchases or trading by a third. The party, on condition of anonymity, a researcher and energy security adviser to the Chinese government.

“Large companies with global business will be more cautious, fearing that their business will be affected by sanctions in the United States or worldwide,” the source said.

However, Bloomberg reported on Thursday that Beijing was in talks with Moscow to buy additional supplies of oil in order to increase China’s strategic crude inventory. White House officials at Air Force One said it would not violate US sanctions.

In contrast to state-owned refineries, which are supposed to be more cautious as state representatives, independent traders are more likely to take the opportunity to buy cheap Russian barrels, Maiden said.

“For [independent refiners]Although, for example, funding is difficult to access, “he said.

Song further noted that refineries are finding it more difficult to obtain financing for Russian-derived goods, especially if they have business establishments in Singapore and deal with Asian banks wary of possible sanctions.

Concerned about the possible imposition of Western sanctions, some major Chinese banks’ offshore units have reportedly cut off financing deals involving Russian goods since the start of the war.

“To get closer to this, there may be a need to pay in advance for the cargoes that are yet to arrive, but now due to the high oil prices, it will raise a lot of capital for small refineries and prevent them from purchasing Russian cargo,” Gunn said.

With Beijing doubling down on its zero-quad policy, with cross-regional transport restricted since March, it is unclear when China’s crude demand will finally return, Maiden said.

“You can ask questions about the quality of the raw product and what kind of recovery,” Maiden said. “Russian crude oil is quite diesel-heavy, [which will be needed] If there is more mobility and you need more petrol. “

In terms of natural gas, Russia was China’s third largest supplier after Australia and Turkmenistan. But since the war began, the price of pipeline natural gas imports from Russia has been declining, despite rising global prices.

According to experts, Russia is unable to redirect pipeline gas destined for Europe to China due to infrastructural constraints. But China will have the opportunity to sell extra liquefied natural gas (LNG), said Elizabeth Wisnik, a senior research scientist at CNA, a US-based nonprofit research and analysis firm.

After a year-on-year decline of 19.4 percent in March, the volume of LNG imports from Russia bounced back in April, an increase of 79.63 percent over the same period last year.

But transporting LNG could be another hurdle, as international-flagged ships would have difficulty doing so, given Russia’s lack of adequate ice-class tankers, Wishnik said.

“[Russia] South Korean tankers were commissioned, but South Korea complied with sanctions and maintained export controls on navigation and marine equipment, “he said.” Chinese companies are cooperating with Japan and Finland to build ice-class LNG tankers for use in the Russian Arctic. “But both Japan and Finland are complying with the sanctions, so it is not clear what effect this will have on these projects.”

Compared to oil, according to tariff and shipment data, steep discounts from Russian coal mines have recently gained increased interest among Chinese buyers.

Coal is the second-most important Russian commodity imported by China, with a trade value of about one-eighth that of crude oil. Post Count

After Beijing unofficially banned Australian coal in late 2020 due to political tensions with Canberra, China’s Russian coal imports have continued to rise. In 2021, it became China’s second largest coal supplier after Indonesia, supplying 52 million tons – including 37.3 million tons of thermal coal and 10.7 million tons of coking coal – accounting for 14.4 percent of China’s total imports.

And similar to the oil-trade situation, according to tariff statistics, Russian coal imports fell 29.7 percent in March compared to the same period last year. According to Prannoy Shukla, associate director of S&P Global Market Intelligence, this was mainly because Chinese traders were reluctant to buy because banks had stopped issuing credit letters (LCs) to Russian coal cargo.

But since some Chinese banks later said they had relaxed restrictions on LCs, the demand from Chinese clients has increased, Shukla said.

In April, imports increased by 22.9 percent compared to March, customs data shows.

Also, the removal of import duties by the Chinese government on all imported coal – previously only Indonesian coal was exempt – will provide additional support to Russian coal cargo from May 1, according to experts.

“By May 2022, marine shipments are expected to reach an all-time high of 7.5 million to 8.5 million tons,” Shukla said.

Nevertheless, the biggest reason for all kinds of energy trade with Russia is the level of Chinese demand suppressed under Beijing’s zero-quad policy, analysts say.

For example, lockdowns in many parts of China have reduced electricity consumption to overshadow market demand to contain coronavirus outbreaks, Fitch Ratings said in its latest China Power Watch report.

“With the price of imported coal significantly higher than that of domestic coal in a tight global supply, high coal prices are putting pressure on the margins of power-generating companies, especially those with more exposure to marine coal.”

The article was originally published in the South China Morning Post (SCMP), the most authoritative voice reporting in China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit SCMP’s Facebook Twitter Pages Copyright 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.

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