SINGAPORE, (Reuters) – Up to 10% of China's oil refining capacity faces closure in the next decade as an earlier-than-expected peak in Chinese fuel demand crushes margins and Beijing's drive to squeeze out inefficiencies begins to squeeze older and smaller plants.
Tougher enforcement of U.S. sanctions under the incoming Trump administration could send more plants into the red and precipitate shutdowns by cutting off access to cheap oil from Iran, industry players and analysts say.
The world's second-largest refining industry has long been plagued by overcapacity after expanding to take advantage of three decades of rapid demand growth.
Authorities, including officials at Shandong province's independent refining hub, lack the political will to close inefficient plants that employ tens of thousands of workers, analysts said.
But China's rapid electrification of vehicles and faltering economic growth are rendering the weakest operators unviable, forcing a moment of reckoning.
The turmoil is likely to limit oil imports to China, which is the world's largest consumer and accounts for 11% of global demand. China's oil imports fell 1.9% in 2024, the only drop in two decades outside of the COVID years, with weaker demand weighing on global oil prices.
Refinery production last year also recorded a rare drop.
Low operating rates are the clearest sign of pain in the industry. Consultancy Wood Mackenzie estimates that Chinese refiners were only using 75.5% of their capacity in 2024, the second-lowest utilization rate since 2019 and well below US refiners' rate of more than 90%.
Worst off are independent fuel makers known as teapots, mostly based in eastern China's Shandong, which make up a quarter of the industry. They operated at just 54% of capacity last year, according to a Chinese consultancy, the lowest since 2017 outside the COVID period.
Beijing effectively flagged the weaker players in 2023 when it pledged to phase out the smallest plants below the national refining capacity limit of 20 million bpd by 2025, up from just over 19 million bpd currently.
Smaller plants have become indispensable after the launch of four large privately-controlled refineries from 2019, which together account for 10% of China's refining capacity, industry players said.
In addition to their problems, Beijing began pursuing independent refiners in 2021 for unpaid tax.
Smaller operators, especially those that do not qualify for Beijing's oil quotas and instead survive on processing imported fuel oil, face another crisis as new tariff and tax policies are set to increase their costs in 2025, industry officials said.
Those plants represent a combined processing capacity of more than 400,000 bpd, two of the executives added.
Several senior executives at independent refiners and analysts estimated that 15 to 20 independent plants, which account for about half of the 4.2 to 5 million barrels per day of teapot capacity, could withstand the stress for a decade or more.
“Those that have a large scale and are integrated with chemical production, 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 the teapots in Shandong.
Wood Mackenzie predicts a capacity shutdown of 1.1 million bpd between 2023 and 2028, or 5.5% of the national cap, and another 1.2 million bpd by 2050.
CRITICAL 2025
Three Shandong-based refineries under state-owned Sinochem Group already faced bankruptcy last year due to hefty unpaid taxes and were shut down indefinitely.
Even if Sinochem succeeds in reopening them, the plants would operate at a cost disadvantage because Sinochem avoids cheap oil from Iran, Venezuela or Russia for fear of sanctions, according to Mia Geng, a China analyst at energy consultancy FGE.
To cope with deteriorating margins, many teapots have switched almost entirely to cheaper oil, particularly from Iran, Reuters reported.
However, the prospect that the US under President-elect Donald Trump could tighten sanctions on Iran's oil, which accounts for more than 10% of China's imports, could push up the cost of teapots further.
China's Shandong Port Group's sudden ban on US tankers 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 there is set to start up its second 200,000 bpd plant in the coming months, exacerbating the fuel glut, Shandong-based traders said.
THE HAND OF GOVERNMENT
Local governments have already forced some streamlining of industry.
To make way for the Yulong plant, a cornerstone project for Shandong, provincial authorities have closed 10 small plants with a total capacity of about 540,000 barrels per day in late 2022.
In addition, in the 2021/2022 nationwide survey, Beijing stripped five refineries of their import quotas, contributing to China's first annual decline in oil imports in two decades in 2022.
Meanwhile, state-owned refiners are moving to invest in higher-end chemicals. PetroChina is set to close its 410,000 bpd Dalian refinery this year and replace it with a smaller new petrochemicals-focused plant.
Similarly, refining giant Sinopec Corp will eventually be forced to close older fuel-focused factories in eastern provinces where electric vehicle penetration is higher, said FGE's Geng and a Sinopec trader, who declined to be named.
Sinopec had no immediate comment when asked about the prospect of a shutdown.
A senior oil purchasing manager who has worked for 16 years at Shandong Teapot said he is looking for a new job because his plant, one of those whose oil quota was withdrawn, is running at 20% capacity and losing money. almost 18 months.
“We are on the verge of closing, after extremely challenging 2023 and 2024,” said the person, who declined to be identified by name or where he works.
“But it's not easy to find a job in the same industry.”
