By 1985, Ma had been moving limestone in his trucks for the highway construction industry as rural tracks became country roads. At this point, his role in this transformation graduated from quite literally the underground upwards when the opportunity to transport the bitumen that forms the macadam on the road surface in an oil tanker presented itself. An oil tanker was acquired, and then another and another, and when the fleet had grown to more than 12 tankers and trucks by 1994, they started to manufacture bitumen themselves. This involved buying heavy oil (the final residue in the refining process) from the local state-owned refinery. However, Ma always took a particular interest in the special oil that was used to lubricate the machinery.

Fast-forward to 1997, when Ma further invested and expanded the bitumen capacity, upscaling the technology from its basic beginnings to move the quality output from country road-standard bitumen to that required for motorways. Key to all of this expansion, says Ma, was the company’s close cooperation with its supplier of crude: Shandong-headquartered Qilu Petrochemical, part of state-owned Sinopec. Qingyuan Group was launched in 1998 and capacity had hit 80,000 tonnes a year by 1999.

Although a huge amount had been achieved in three decades, Ma was keen to widen the gene pool when it came to sourcing crude imports, to include global oil majors. The Chinese authorities had been granting crude oil import licences to independent (i.e. non-state-owned) refineries such as Qingyuan – known ironically in the industry as ‘teapots’ because of their small size in comparison with state-owned enterprises – since 2016.

By the end of that year, around 19 independent oil refineries had import quotas of almost 1.5 million barrels per day (mbpd) – more than the net imports of some European countries. Qingyuan’s total crude oil import quota for 2019 is 7.04mt.

Chinese product supplies had surged, leading to an increase in exports to other Asian markets.² But this could not last, and a period of market consolidation followed once the teapots had expanded to compete with state-owned groups. A battle for market share between independent and state-owned companies unfolded, complicated by a slowing demand for refined products in a climate of excess capacity. As the Financial Times put it in 2017: “The goal for the surviving independent refineries is to put pressure on state-owned companies to become more efficient without creating an existential threat to their dominance.”³

To take advantage of the crude import licence quotas, the group needed to settle crude purchases in US dollars, explains Finance Director Chen Chun Xia. In addition, rising oil prices and increased working capital requirements meant that facilities from Chinese banks alone were no longer enough. “The refining business relies on availability of funding and it is a capital-intensive business,” she notes.

With a good track record of API-II and API-III quality base oil production behind it, together with Qingyuan Group’s additional revenue streams such as plastics, and overall financial stability (profits were continuously reinvested in the plant and machinery), the group was now attractive to international lenders.

A tightening of China’s currency outflow regulations from the State Administration of Foreign Exchange as part of Beijing’s move to boost currency and protect FX reserves in 2016 made offshore financing an attractive option for corporates seeking deeper dollar liquidity. “Qingyuan Group first tapped the onshore USD market in early 2016 and then the more liquid offshore USD market via the US$650m facility in June 2017,” recalls Frank Wu, Deutsche Bank’s Head of Structured Commodity Trade Finance Asia Pacific. Since then, the refinery has been steadily moving its funding from onshore to offshore.

The loan proceeds are disbursed to JCHK and used for crude oil purchases from the crude suppliers under a supply contract. JCHK then on-sells the crude to Qingyuan under a feedstock purchase contract. By acting as the co-borrower, Qingyuan plays the de facto guarantor role.

The facility relies on the performance of Qingyuan under the off-take contract; in other words, the ability to produce and deliver base oil to its distributor partner, CNOOC. It has a one-year tenor matching that of the facility and specifies the minimum value of base oil deliveries based on the debt service coverage ratio of 135%.

The three pre-delivery financing facilities, all closed in 2018, collectively went on to win a TXF Best Overall Commodities Finance Deal of the Year 2018 award, and Ma brought his team to Amsterdam to celebrate their success. Talking to Trade Finance TV shortly before the presentation, Ma reflected: “It took 38 years to get from my farm to where we are now. Were it not for the opening up of the Chinese economy, we would not be here now – I would still be on the farm. But we made it, and I could realise my dream of building an international business.”⁴

I ask Ma and his team about their export plans. Thus far, Chinese demand for base oil-related products has outstripped capacity. However, the existing relationships with oil majors and commodity traders, and now international banks, have paved the way for developing Qingyuan’s export client bases. “I believe the market will continue to be open to us and the reform of the Chinese economy will continue,” he says.

Ma adds: “As a privately owned enterprise we were granted crude oil import licences that enabled us to source crude oil from international traders. With the support from international banks we have grown and reinvested our profits. We do believe this trend will continue and we will continue to work with international banks.”

And there is no shortage of banks happy to be part of this winning team.

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Sources

¹ See https://bbc.in/2YbSdWb at news.bbc.co.uk
² The Rise of China’s Independent Refineries, by Erica Downs, Columbia SIPA Center on Global Energy Policy, September 2017
³ See https://on.ft.com/2eLG4yT at ft.com
⁴ See https://bit.ly/2ySsPXf at tradefinancetv.net