At least three independent refiners have had $600 million (464 million pounds) in credit lines suspended by international banks, said three refinery and trading executives and two finance directors at the affected companies, requesting anonymity because of the sensitivity of the matter.
DBS Group Holdings in Singapore, France's Natixis and BNP Paribas, and Dutch bank ING [INGA.AS] have suspended open account credit facilities for the companies based in Shandong province, home to the majority of the independent plants that buy about 20% of China's oil imports, the sources said.
The refinery sources said the suspensions are for open accounts, typically revolving credit lines that are issued before any oil is shipped and delivered, and also "back-to-back" accounts, credits that are guaranteed by a letter of credit from a Chinese bank.
"All our applications for new open-account credits are frozen ... these clean credits are pivotal as we buy 6 to 8 million barrels of oil each month," said one of the sources, a trading executive at a Shandong-based refinery.
DBS, Natixis and ING declined to comment. BNP said in a statement that the bank "is providing its support to companies in China at this difficult time, extending financing lines and loan maturities where required."
"We were told by our banks that so long as the open-account credits are for oil heading to Shandong, it will be very hard chance winning approvals," said a second source, the head of a Shandong refiner's Singapore operation.
The three companies have combined annual oil import quotas of 12 million tonnes, or 240,000 barrels per day. The credit suspensions will curb their purchases and wider suspensions in the sector could impact oil prices that have dropped because of China's coronavirus outbreak.
GRAPHIC: China teapot refiner utilization rates https://fingfx.thomsonreuters.com/gfx/ce/7/8575/8556/ChinaTeapotUtilRates.png
While some "genuine credit risks" exist among the Shandong teapot refiners, there is more concern among banks that the refiners' revenue losses from the drop in domestic fuel demand because of the coronavirus outbreak will limit their ability to repay their debt, said a senior Greater China trade finance banker at a global bank.
His bank has tightened their credit terms for some teapot refiners but have not suspended them.
The slowdown in economic and industrial activities has caused an excess of refined oil in storage, he said.
"They don't have enough storage to get fresh crude supply. Things are not going to pick up in a very big way in the next couple of months so demand for refined oil in the market is not going to go through the roof," he said.
"So why do they need fresh credit lines now?" he said.
The perception of Chinese credit risk has increased after several large dollar bond defaults by state-owned enterprises (SOE) at the end of 2019, including commodities trader Tewoo Group, backed by the city government of Tianjin, and Peking University Founders Group.
Chinese private businesses defaulted on about 12.5% of their maturing bonds in 2018 and in the first 10 months of 2019, rating agency S&P said in November, compared to 0.2% for SOEs. The agency predicts more bond defaults in 2020.
GRAPHIC: Banks tighten credit terms for China's teapot refiners after refining margin tumble in 2019 https://fingfx.thomsonreuters.com/gfx/ce/7/8574/8555/AsiaRefMargins.png
(Additional reporting from Anshuman Daga in Singapore, Maya Nikolaeva in Paris and Anthony Deutsch in Amsterdam; Editing by Florence Tan and Christian Schmollinger)
By Chen Aizhu and Sumeet Chatterjee