China's teapots pause Iran oil orders after US sanctions refinery

A man is seen at an exit of the refinery plants of Chambroad Petrochemicals in Binzhou, Shandong province, China October 24, 2019.
A man is seen at an exit of the refinery plants of Chambroad Petrochemicals in Binzhou, Shandong province, China October 24, 2019.

Small Chinese non-state refineries—known as “teapots”—appear to be holding off on new orders of Iranian crude following Washington’s recent sanctions on Shouguang Luqing Petrochemicals, a refinery based in Shandong.

According to market intelligence cited by maritime data firm Kpler, no fresh deals for Iranian crude have been reported since March 20.

Iran’s main oil customers are small Chinese refineries, officially not linked to state structures, most of which are based in Shandong, where 90% of Iranian oil cargoes is discharged.

Refiners are assessing the risks associated with continuing to purchase Iranian crude and are closely monitoring the repercussions faced by the sanctioned Shouguang Luqing Petrochemicals, which has a refining capacity of 60,000 barrels per day.

While there are currently no indications that banks have cut off financing for Luqing, the refinery's ability to secure financing and maintain operations could influence the decisions of other teapots, particularly those heavily reliant on Iranian crude as their primary feedstock, according to Kpler.

Despite the cautious approach to new orders, China's imports of Iranian crude are still projected to show a significant month-on-month increase in March.

As of March 26, Iranian cargoes transported by vessels not listed under US Office of Foreign Assets Control (OFAC) sanctions appeared to have discharged successfully in Chinese ports, suggesting that ports have not yet turned away Iranian crude despite the tighter US sanctions.

Iran’s oil sales to China dropped sharply in January. Data from Kpler shows that Iran’s oil deliveries to China fell below 850,000 barrels per day in the period, compared to over 1.8 million barrels per day in October last year.

However, the recent US move to sanction Huizhou Huaying, an oil terminal in southern China, may prompt some ports to re-evaluate the risks of accepting sanctioned vessels in the future.

Data indicates that two Aframax tankers blacklisted by OFAC earlier this year managed to discharge Iranian crude at the ports of Yangshan and Dongying this week.

The US sanctions on the Chinese refinery come as part of Washington's efforts to maximize economic pressure on Iran to disrupt its access to financial resources. Iran's oil sales are a key target of these sanctions.