SINGAPORE (Reuters) – Up to 10% of China’s oil refining capacity faces closure over the next ten years as an earlier-than-expected spike in Chinese fuel demand crushes margins and Beijing’s attempt By eliminating inefficiency it begins to squeeze the oldest and smallest plants. .
Stricter enforcement of U.S. sanctions under the incoming Trump administration could push more plants into the red and accelerate shutdowns by stopping access to cheap crude from countries like Iran, industry players and analysts say.
The world’s second-largest refining industry has long been plagued by excess capacity after expanding to capitalize on three decades of rapid demand growth.
Authorities, including officials at Shandong province’s independent refining center, have lacked the political will to close inefficient plants that employ tens of thousands of workers, analysts said.
However, the rapid electrification of Chinese vehicles and weakening economic growth are making weaker operators unviable, forcing a moment of reckoning.
The restructuring is likely to limit crude imports from China, the world’s biggest buyer, which accounts for 11% of global demand. Chinese crude oil imports declined 1.9% in 2024, the only decline in the past two decades outside of the COVID years, and weaker demand weighs on global oil prices.
Refinery production last year also recorded an unusual drop.
Low operating rates are the clearest sign of the industry’s problems. Consulting firm Wood Mackenzie estimates that Chinese refineries ran at just 75.5% of capacity in 2024, the second-lowest utilization rate since 2019 and significantly below the U.S. refinery rate of more than 90%.
The worst off are the independent fuel producers known as teapots, located mostly in Shandong in eastern China and accounting for a quarter of the industry. They operated at just 54% capacity last year, according to a Chinese consulting firm, the lowest level since 2017 outside of the COVID years.
The weaker players were effectively put on notice by Beijing in 2023 when it promised to phase out smaller plants under a national refining capacity cap of 20 million barrels per day by 2025, only slightly above the current 19 million bpd.
Smaller plants have become dispensable following the launch of four large privately controlled refineries since 2019, which together account for 10% of China’s refining capacity, industry players said.
Compounding its challenges, Beijing began pursuing independent refiners in 2021 for unpaid taxes.
Smaller operators, especially those that do not qualify for Beijing’s crude oil quotas and survive by processing imported fuel oil, face a new crisis as new tariff and tax policies will increase their costs in 2025, industry executives said.
Those plants represent a combined processing capacity that exceeds 400,000 bpd, two of the executives added.
Several senior managers at independent refiners and one analyst estimated that between 15 and 20 independent plants, representing about half of the kettle’s 4.2 million to 5 million bpd of capacity, could withstand the stress for a decade or more.
“Those of scale and integrated with chemical production, which have room for expansion and infrastructure such as pipelines and terminals, could be sustained in the long term,” said Wang Zhao, senior researcher at Sublime China Information, referring to teapots in Shandong.
Wood Mackenzie predicts closures of 1.1 million bpd of capacity between 2023 and 2028, or 5.5% of the declared national limit, and a further 1.2 million bpd by 2050.
CRITICAL 2025
Three Shandong-based refineries of state-owned group Sinochem already faced bankruptcy last year due to heavy unpaid taxes and were closed indefinitely.
Even if Sinochem managed to reopen them, the plants would operate at a cost disadvantage as Sinochem avoids discounted oil from Iran, Venezuela or Russia due to sanctions concerns, according to Mia Geng, a China analyst at energy consultancy FGE.
To cope with deteriorating margins, many kettles have switched almost entirely to discounted oil, especially from Iran, Reuters reported.
However, the prospect that the United States, under incoming President Donald Trump, could tighten sanctions on Iranian oil, which accounts for more than 10% of Chinese imports, could push kettle costs even higher.
A sudden ban on US-sanctioned tankers by China’s Shandong Port Group is already shaking up the shipping market and driving up oil prices.
Plants in Shandong face a particularly tough year in 2025 as the $20 billion Yulong petrochemical plant is due to commission its second 200,000 bpd crude unit in the coming months, worsening the fuel surplus. Shandong-based traders said.
HAND OF THE GOVERNMENT
Local governments have already forced some rationalization of the industry.
To make way for the Yulong plant, a key project for Shandong, provincial authorities closed 10 small plants at the end of 2022 for a total of about 540,000 bpd.
Additionally, in a nationwide investigation in 2021/2022, Beijing stripped five refiners of their import quotas, contributing to the first annual drop in China’s crude oil imports in two decades in 2022.
Meanwhile, state refiners are shifting to investments in high-end chemicals. PetroChina will close a 410,000 bpd refinery in Dalian this year and replace it with a new, smaller plant focused on petrochemicals.
Similarly, refining giant Sinopec Corp will eventually be forced to close older fuel-focused plants in eastern provinces where electric vehicle penetration is highest, said FGE’s Geng and a Sinopec trader who asked not to be identified. .
Sinopec had no immediate comment when asked about the prospect of closures.
A senior crude oil procurement manager who has worked at a Shandong teapot for 16 years said he has been looking for a new job as his plant, one of those that have been stripped of a crude oil quota, is running at 20 % capacity and has been losing money. for almost 18 months.
“We are about to close, after an extremely tough 2023 and 2024,” said the person, who did not want to be identified by name or where they work.
“But it’s not easy to find work in the same sector.”
