By Chen Aizhu
SINGAPORE (Reuters) - Up to 10% of China's refining capacity faces closure over the next decade as fuel demand peaks earlier than expected, pushing down profit margins and Beijing's move to stamp out inefficiencies begins to squeeze out Suppress old and small factories.
Industry insiders and analysts say the incoming Trump administration will tighten U.S. sanctions that could drive more plants into the red and accelerate closures by blocking access to cheap crude from countries such as Iran.
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.
Analysts say authorities, including officials at the independent refining center in Shandong province, lack the political will to close inefficient plants employing tens of thousands of workers.
However, China's rapid electrification of vehicles and weak economic growth are straining the weakest operators, forcing them to rethink.
The shock could limit crude oil imports from China, the world's largest buyer, accounting for 11% of global demand. In 2024, China's crude oil imports fell by 1.9%, which was the only decline in the past two decades except for the new crown epidemic. Weak demand has suppressed global oil prices.
Refinery output also saw a rare decline last year.
Low operating rates are the clearest sign of the industry's pain. Consulting firm Wood Mackenzie estimates that Chinese refineries will operate at just 75.5% capacity in 2024, the second-lowest utilization rate since 2019 and well below U.S. refineries' utilization rate of more than 90%.
Worst of all are the independent fuel producers known as "teapots," mostly based in eastern China's Shandong province and accounting for a quarter of the industry. Last year, they operated at just 54%, the lowest level since the COVID-19 outbreak in 2017, according to a Chinese consulting firm.
Beijing effectively took note of weaker players in 2023, when China vowed to phase out the country's smallest refinery plants, capped at 20 million bpd (currently just over 19 million bpd), by 2025.
Industry insiders say these small refineries have become dispensable since 2019 with the commissioning of four large private refineries, which together account for 10% of China's refining capacity.
In 2021, Beijing began going after independent refiners for unpaid taxes, adding to their challenges.
Industry executives say smaller operators, especially those that don't meet Beijing's crude quotas and rely on processing imported fuel oil to survive, will face further tightening as new tariffs and taxes are set to drive up costs in 2025.
The plants have a combined processing capacity of more than 400,000 barrels per day, the two executives added.
Several senior independent refinery executives and one analyst estimated that 15 to 20 independent refineries, accounting for about half of the 4.2 million to 5 million barrels per day teapot capacity, could withstand the pressure for a decade or more.
"Those companies that are large-scale and integrated with chemical production have land space for expansion and infrastructure such as pipelines and docks and can sustain themselves in the long term," Wang Zhao, a senior researcher at Gao Gao China Information Company, said of Shandong's teapots. ”
Wood Mackenzie expects to close 1.1 million barrels per day (bpd) of capacity between 2023 and 2028, or 5.5% of the mandated national cap, with a further 1.2 million barrels per day (bpd) by 2050.
2025 is crucial
Last year, three Shandong refineries owned by state-run Sinochem Group faced bankruptcy and were shut down indefinitely due to huge unpaid taxes.
Mia Geng, China analyst at energy consultancy FGE, said even if Sinochem managed to reopen the plants, they would operate at a cost disadvantage because Sinochem has avoided discounts in Iran, Venezuela or Russia due to sanctions concerns oil.
In response to deteriorating profit margins, many teapots have turned almost exclusively to cheap oil, especially from Iran, Reuters reported.
However, the United States under incoming President Donald Trump is likely to tighten sanctions on Iranian oil, which accounts for more than 10% of China's oil imports, which could further increase the cost of teapots.
China's Shandong Port Group's sudden ban on U.S.-sanctioned tankers has shaken shipping markets and pushed up oil prices.
Traders in Shandong say 2025 will be a particularly difficult year for Shandong plants as the $20 billion Yulong petrochemical plant is set to start up a second 200,000 barrels per day crude unit in the coming months, exacerbating a fuel glut.
government hand
Local governments have forced some industries to streamline.
To make way for the Yulong plant, a cornerstone project in Shandong Province, the provincial government has closed 10 small plants with a total capacity of about 540,000 barrels per day by the end of 2022.
Additionally, Beijing canceled import quotas for five refineries in the 2021/2022 nationwide survey, leading to the first annual decline in China's crude oil imports in 2022 in two decades.
At the same time, state-owned refineries are turning to investments in high-end chemicals. PetroChina will close a 410,000-barrel-per-day refinery in Dalian this year and replace it with a new, smaller plant focused on petrochemicals.
Likewise, refining giant Sinopec will eventually be forced to close older fuel-focused plants in eastern provinces where EV penetration is high, FGE's Geng and a Sinopec trader said on condition of anonymity.
Sinopec had no immediate comment when asked about the prospect of a shutdown.
A senior crude oil purchasing manager who has worked at Shandong Teapot for 16 years said he has been looking for a new job because his plant was one of the plants whose crude oil quotas were canceled, with a capacity utilization rate of 20% and has been losing money. Nearly 18 months.
"After an extremely difficult 2023 and 2024, we are on the verge of closure," said the person, who did not want to be identified by name or where he works.
“But it’s not easy to find a job in the same industry.”
(Reporting by Chen Aizhu; Editing by Sonali Paul)