SINGAPORE, (Reuters) – As much as 10% of China’s oil refining capability faces closure in the following ten years as an earlier-than-expected peak in Chinese fuel demand crushes margins and Beijing’s drive to wring out inefficiency begins to squeeze older and smaller plants.
Tighter U.S. sanctions enforcement under the incoming Trump administration could send more plants into the red and speed up shutdowns by halting access to low-cost crude from the likes of Iran, industry players and analysts say.
The world’s second-largest refining industry has long been affected by excess capability after expanding to capitalise on three a long time of rapid demand growth.
Authorities, including officials within the independent refinery hub of Shandong province, have lacked political will to shut inefficient plants that employ tens of 1000’s of staff, analysts said.
Nonetheless, rapid electrification of China’s vehicles and flagging economic growth are making the weakest operators unviable, forcing a moment of reckoning.
The shakeout is more likely to cap crude imports into China, the world’s largest buyer, accounting for 11% of worldwide demand. Chinese crude imports declined 1.9% in 2024, the one drop within the last 20 years outside the COVID years, with weaker demand weighing on global oil prices.
Refinery output last yr recorded a rare fall as well.
Poor operating rates are the clearest sign of the industry’s pain. Consultancy Wood Mackenzie estimates Chinese refineries ran at only 75.5% of their capability in 2024, the second-lowest utilisation rate since 2019 and significantly below U.S. refiners’ rate of above 90%.
Worst off are independent fuel producers often called teapots, mostly positioned in east China’s Shandong, which make up 1 / 4 of the industry. They operated at just 54% of capability last yr, based on a Chinese consultancy, the bottom since 2017 outside the COVID years.
Weaker players were effectively placed on notice by Beijing in 2023 when it vowed to weed out the smallest plants under a national refining capability cap of 20 million barrels per day by 2025, only barely above 19 million bpd currently.
The smaller plants have grow to be dispensable following the start-up of 4 large privately-controlled refiners since 2019 which together make up 10% of China’s refining capability, industry players said.
Adding to their challenges, Beijing began chasing independent refiners in 2021 for unpaid tax.
Smaller operators, especially people who don’t qualify for Beijing’s crude oil quotas and survive as an alternative on processing imported fuel oil, face an extra crunch as latest tariff and tax policies are set to drive up their costs in 2025, industry executives said.
Those plants account for combined processing capability exceeding 400,000 bpd, two of the executives added.
Several senior managers at independent refineries and an analyst estimated that between 15 and 20 independent plants, accounting for roughly half of the 4.2 million to five million bpd of teapot capability, could withstand the stress for a decade or more.
“Those of scale and integrated with chemicals production, having land space for expansion and infrastructure like pipelines and terminals in place, could sustain in the long term,” said Wang Zhao, a senior researcher at Sublime China Information, referring to teapots in Shandong.
Wood Mackenzie predicts closures of 1.1 million bpd in capability between 2023 and 2028, or 5.5% of the stated national cap, and an extra 1.2 million bpd by 2050.
CRITICAL 2025
Already, three Shandong-based refineries under state-run Sinochem Group faced bankruptcy last yr as a result of hefty unpaid taxes and were shut indefinitely.
Even when Sinochem managed to reopen them, the plants would operate at a price drawback as Sinochem shuns discounted oil from Iran, Venezuela or Russia as a result of sanctions concerns, based on Mia Geng, energy consultant FGE’s China analyst.
To address deteriorating margins, many teapots have shifted almost completely to discounted oil, especially from Iran, Reuters has reported.
Nonetheless, the prospect that the U.S. under incoming President Donald Trump could harden sanctions enforcement on Iranian oil, which accounts for over 10% of Chinese imports, could further raise costs for teapots.
A sudden ban on U.S.-sanctioned tankers by China’s Shandong Port group is already rocking the shipping market and lifting oil prices.
Plants in Shandong face a very tough yr in 2025 because the $20 billion Yulong Petrochemical plant there may be as a result of initiate its second 200,000-bpd crude unit in coming months, worsening the fuel surplus, said Shandong-based traders.
GOVERNMENT HAND
Local governments have already forced some industry streamlining.
To make way for the Yulong plant, a cornerstone project for Shandong, provincial authorities by late 2022 closed 10 small plants totalling about 540,000 bpd.
As well as, in a nationwide probe in 2021/2022, Beijing stripped five refineries of their import quotas, which contributed to the primary annual decline in China’s crude oil imports in 20 years in 2022.
Meanwhile, state-owned refiners are shifting to higher-end chemicals investment. PetroChina is ready to shut a 410,000-bpd refinery in Dalian this yr and replace it with a smaller latest plant specializing in petrochemicals.
Similarly, refining giant Sinopec Corp will eventually be compelled to shut older fuel-centric plants 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 concerning the prospect of closures.
A senior crude oil procurement manager who has worked at a Shandong teapot for 16 years said he has been on the lookout for a latest job as his plant, certainly one of those stripped of a crude oil quota, is running at 20% capability and has been losing money for nearly 18 months.
“We’re on the verge of closing down, after a particularly tough 2023 and 2024,” said the person, declining to be identified by name or where he works.
“Nevertheless it will not be easy to seek out a job in the identical industry.”