SINGAPORE (Reuters) – Up to 10 of China’s oil refining capacity will be cut as an earlier-than-expected peak in China’s fuel demand squeezes margins and Beijing’s efforts to squeeze out inefficiencies begin to squeeze aging small plants. % could face closure in the next 10 years.
Industry officials and analysts predict that tightening U.S. sanctions under the incoming Trump administration will cut off access to cheap crude oil from countries such as Iran, pushing more factories into the red and forcing them to shut down operations. He says there is a possibility that it will accelerate.
The world’s second-largest refining industry has long been plagued by overcapacity after taking advantage of three decades of rapid demand growth to expand its operations.
Analysts say authorities, including those at independent refinery hubs in Shandong province, lack the political will to shut down inefficient factories that employ tens of thousands of workers.
However, the rapid electrification of China’s vehicles and slowing economic growth mean that the weakest operators cannot survive and are facing instant liquidation.
The cuts are likely to limit crude oil imports to China, the world’s biggest buyer, which accounts for 11% of global demand. China’s crude oil imports will decline by 1.9% in 2024, with the decline in demand weighing on world crude oil prices, marking the only decline in the past 20 years excluding the impact of the new coronavirus infection. .
Refinery output also recorded a rare decline last year.
Declining utilization rates are the clearest indicator of the industry’s pain. Consultancy Wood Mackenzie estimates that Chinese refineries will operate at only 75.5% of capacity in 2024, the second lowest operating rate since 2019, surpassing U.S. refineries’ operating rates of over 90%. We estimate that it is significantly lower.
The worst offender is an independent fuel producer known as Teapot, which is based primarily in eastern China’s Shandong province and accounts for a quarter of the industry. According to a Chinese consultancy, occupancy was just 54% last year, the lowest since 2017 excluding the coronavirus period.
In 2023, when the Chinese government announced it would weed out the smallest plants under the country’s 20 million barrels per day refining capacity cap by 2025 (currently just over 19 million barrels per day); Weak players were effectively warned off.
Small-scale plants have become essential after 2019, when four major private refineries, which together account for 10% of China’s refining capacity, began operations, industry officials said.
Adding to the challenge, the Chinese government began pursuing independent refiners for unpaid taxes in 2021.
Industry executives say new tariff and tax policies will force small and medium-sized businesses, especially those that are not subject to the Chinese government’s crude oil quotas and make a living from processing imported fuel oil, into a The company is facing further jeopardy as costs are set to rise.
The plants have a combined capacity of more than 400,000 barrels per day, the two executives added.
Several senior independent refinery managers and analysts estimated that 15 to 20 independent plants, representing about half of the 4.2 million to 5 million barrels per day teapot capacity, could withstand stress for more than 10 years. .
Wang Zhao, a senior researcher at Sublime China Information, said, referring to Shandong’s teapots, they are “large in scale, integrated with chemical production, and require land space for expansion and infrastructure such as pipelines and terminals. “Those that have a well-developed structure have the potential to be sustainable over the long term.”
Wood Mackenzie said 1.1 million barrels per day are expected to be shut down between 2023 and 2028, equivalent to 5.5% of the national cap, and a further 1.2 million barrels per day will be shut down by 2050. It is predicted that
critical 2025
Already, three refineries under the state-run Sinochem Group, based in Shandong province, faced bankruptcy and indefinite closure last year due to unpaid taxes.
Mia Geng, a China analyst at energy consultant FGE, said that even if Sinochem manages to restart, the plant will be cost-effective as Sinochem avoids discounted crude oil from Iran, Venezuela and Russia due to sanctions concerns. It will likely be operated under unfavorable conditions.
To deal with worsening profit margins, many teapots have shifted almost entirely to discounted crude oil, especially from Iran, Reuters reported.
However, the prospect that the United States under President-elect Donald Trump may tighten sanctions on Iranian oil, which accounts for more than 10% of China’s imports, could push teapot prices further higher.
China’s Shandong Port Group’s sudden embargo on US-licensed tankers has already shaken shipping markets and pushed up oil prices.
Shandong plants will face a particularly tough year in 2025, according to Shandong-based traders. The $20 billion Yulong Petrochemical Plant is scheduled to open its second 200,000-barrel-per-day crude oil production facility in the coming months, worsening fuel surpluses.
government’s hand
Local governments have already forced the rationalization of some industries.
To make way for Shandong’s flagship project, the Yulong plant, provincial authorities have closed 10 small-scale plants (with a total capacity of about 540,000 barrels per day) by the end of 2022.
Furthermore, in the 2021/2022 national survey, the Chinese government stripped five refineries of their import quotas, which led to the first annual decline in China’s crude oil imports in 20 years in 2022.
Meanwhile, state-run refineries are shifting investment into high-end chemicals. PetroChina plans to close its 410,000 barrel-per-day refinery in Dalian this year and replace it with a new, smaller plant specializing in petrochemical products.
Similarly, oil refining giant Sinopec will eventually be forced to close older fuel-intensive plants in Eastern Province, where electric vehicle penetration is high, said FGE’s Geng and a Sinopec trader who requested anonymity. As stated in the conditions.
Sinopec had no immediate comment when asked about the prospect of closure.
A senior crude oil procurement manager who has worked for Teapot in Shandong Province for 16 years said that his company’s factory, which was one of those stripped of its crude oil quota, was operating at 20% capacity and was in the red. , said he was looking for a new job. For almost 18 months.
“2023 and 2024 have been so tough that we are on the brink of closure,” said the person, who declined to give his name or company.
“But finding a job in the same industry is not easy.”
