China’s Oil Refining Industry Faces Uncertain Future
Peak Demand and Efficiency Drive Spell Trouble for Small Refineries
China’s oil refining industry is on the brink of a significant transformation, with up to 10% of its capacity facing closure in the next decade. The country’s fuel demand has peaked earlier than expected, leading to a decline in refining margins and forcing Beijing to tackle inefficiencies in the sector.
Tighter Sanctions and Electrification of Vehicles Accelerate Shutdowns
The incoming Trump administration’s stricter enforcement of U.S. sanctions could further exacerbate the situation, limiting access to cheap crude oil from countries like Iran. Meanwhile, the rapid electrification of China’s vehicles and slowing economic growth are making it difficult for smaller refineries to remain viable.
Industry’s Pain Points: Poor Operating Rates and Excess Capacity
Refinery output declined last year, with operating rates at a mere 75.5% of capacity, the second-lowest since 2019. Independent fuel producers, known as teapots, are the worst affected, operating at just 54% of capacity last year. These smaller plants, mostly located in Shandong province, are struggling to survive due to lack of access to cheap crude oil and limited infrastructure.
Beijing’s Refining Capacity Cap and Tax Crackdown
Beijing has vowed to weed out the smallest plants under a national refining capacity cap of 20 million barrels per day by 2025. The government has also begun chasing independent refiners for unpaid taxes, adding to their challenges. New tariff and tax policies set to take effect in 2025 will drive up costs for these plants, making it even harder for them to stay afloat.
Large Privately-Controlled Refiners Gain Advantage
The start-up of four large privately-controlled refiners since 2019 has given them an edge over smaller plants. These new refiners, which account for 10% of China’s refining capacity, have better infrastructure and economies of scale, making them more competitive.
Closures and Consolidation on the Horizon
Industry experts predict that between 15 and 20 independent plants, accounting for roughly half of the 4.2 million to 5 million bpd of teapot capacity, could withstand the stress for a decade or more. However, Wood Mackenzie estimates that closures of 1.1 million bpd in capacity between 2023 and 2028, and a further 1.2 million bpd by 2050, are likely.
Critical Year Ahead for Shandong Refineries
Three Shandong-based refineries under state-run Sinochem Group faced bankruptcy last year due to unpaid taxes and were shut indefinitely. The start-up of the $20 billion Yulong Petrochemical plant in Shandong this year will further worsen the fuel surplus, making it a critical year for refineries in the region.
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