By Chen Aizhu
SINGAPORE, (Reuters) – As much as 10% of China’s oil refining capability faces closure within the subsequent ten years as an earlier-than-expected peak in Chinese language gas demand crushes margins and Beijing’s drive to wring out inefficiency begins to squeeze older and smaller vegetation.
Tighter U.S. sanctions enforcement below the incoming Trump administration may ship extra vegetation into the crimson and speed up shutdowns by halting entry to low cost crude from the likes of Iran, trade gamers and analysts say.
The world’s second-largest refining trade has lengthy been suffering from extra capability after increasing to capitalise on three many years of fast demand development.
Authorities, together with officers within the impartial refinery hub of Shandong province, have lacked political will to close inefficient vegetation that make use of tens of 1000’s of employees, analysts mentioned.
Nevertheless, fast electrification of China’s automobiles and flagging financial development are making the weakest operators unviable, forcing a second of reckoning.
The shakeout is prone to cap crude imports into China, the world’s largest purchaser, accounting for 11% of world demand. Chinese language crude imports declined 1.9% in 2024, the one drop within the final twenty years outdoors the COVID years, with weaker demand weighing on world oil costs.
Refinery output final 12 months recorded a uncommon fall as effectively.
Poor working charges are the clearest signal of the trade’s ache. Consultancy Wooden Mackenzie estimates Chinese language refineries ran at solely 75.5% of their capability in 2024, the second-lowest utilisation charge since 2019 and considerably under U.S. refiners’ charge of above 90%.
Worst off are impartial gas producers often called teapots, largely situated in east China’s Shandong, which make up 1 / 4 of the trade. They operated at simply 54% of capability final 12 months, in line with a Chinese language consultancy, the bottom since 2017 outdoors the COVID years.
Weaker gamers have been successfully placed on discover by Beijing in 2023 when it vowed to weed out the smallest vegetation below a nationwide refining capability cap of 20 million barrels per day by 2025, solely barely above 19 million bpd presently.
The smaller vegetation have grow to be dispensable following the start-up of 4 giant privately-controlled refiners since 2019 which collectively make up 10% of China’s refining capability, trade gamers mentioned.
Including to their challenges, Beijing started chasing impartial refiners in 2021 for unpaid tax.
Smaller operators, particularly these that don’t qualify for Beijing’s crude oil quotas and survive as a substitute on processing imported gas oil, face an extra crunch as new tariff and tax insurance policies are set to drive up their prices in 2025, trade executives mentioned.
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These vegetation account for mixed processing capability exceeding 400,000 bpd, two of the executives added.
A number of senior managers at impartial refineries and an analyst estimated that between 15 and 20 impartial vegetation, accounting for roughly half of the 4.2 million to five million bpd of teapot capability, may face up to the stress for a decade or extra.
“These of scale and built-in with chemical substances manufacturing, having land area for enlargement and infrastructure like pipelines and terminals in place, may maintain in the long run,” mentioned Wang Zhao, a senior researcher at Chic China Data, referring to teapots in Shandong.
Wooden Mackenzie predicts closures of 1.1 million bpd in capability between 2023 and 2028, or 5.5% of the acknowledged nationwide cap, and an extra 1.2 million bpd by 2050.
CRITICAL 2025
Already, three Shandong-based refineries below state-run Sinochem Group confronted chapter final 12 months as a consequence of hefty unpaid taxes and have been shut indefinitely.
Even when Sinochem managed to reopen them, the vegetation would function at a value drawback as Sinochem shuns discounted oil from Iran, Venezuela or Russia as a consequence of sanctions considerations, in line with Mia Geng, power marketing consultant FGE’s China analyst.
To deal with deteriorating margins, many teapots have shifted virtually utterly to discounted oil, particularly from Iran, Reuters has reported.
Nevertheless, the prospect that the U.S. below incoming President Donald Trump may harden sanctions enforcement on Iranian oil, which accounts for over 10% of Chinese language imports, may additional increase prices for teapots.
A sudden ban on U.S.-sanctioned tankers by China’s Shandong Port group is already rocking the transport market and lifting oil costs.
Vegetation in Shandong face a very powerful 12 months in 2025 because the $20 billion Yulong Petrochemical plant there is because of begin up its second 200,000-bpd crude unit in coming months, worsening the gas surplus, mentioned Shandong-based merchants.
GOVERNMENT HAND
Native governments have already compelled some trade streamlining.
To make manner for the Yulong plant, a cornerstone undertaking for Shandong, provincial authorities by late 2022 closed 10 small vegetation totalling about 540,000 bpd.
As well as, in a nationwide probe in 2021/2022, Beijing stripped 5 refineries of their import quotas, which contributed to the primary annual decline in China’s crude oil imports in twenty years in 2022.
In the meantime, state-owned refiners are shifting to higher-end chemical substances funding. PetroChina is about to close a 410,000-bpd refinery in Dalian this 12 months and exchange it with a smaller new plant specializing in petrochemicals.
Equally, refining big Sinopec Corp will finally be compelled to shut older fuel-centric vegetation in jap provinces the place electrical automobile penetration is greater, mentioned FGE’s Geng and a Sinopec dealer who declined to be named.
Sinopec had no fast remark when requested concerning the prospect of closures.
A senior crude oil procurement supervisor who has labored at a Shandong teapot for 16 years mentioned he has been searching for a brand new job as his plant, a type of stripped of a crude oil quota, is operating at 20% capability and has been dropping cash for almost 18 months.
“We’re on the verge of closing down, after an especially powerful 2023 and 2024,” mentioned the individual, declining to be recognized by title or the place he works.
“However it isn’t simple to discover a job in the identical trade.”
(Reporting by Chen Aizhu; Modifying by Sonali Paul)
