Oil refining is joining steel, coal and aluminium in the ranks of sectors suffering from overcapacity in China, with increased production and a drop in truck transport forcing a wave of Chinese diesel sales into international markets.
The structural shift could dent returns for Asian and Middle Eastern refiners including Saudi Aramco after years of expansion to meet China’s needs as a net fuel importer.
The start-up of a 10m tonne per year refinery in Kunming in south-west China accounts for about half the anticipated capacity expected to be added in China this year, swelling an estimated 100m tonnes of existing excess capacity. China had 710m tonnes of refining capacity at the end of last year, according to the CNPC Research Institute of Economics and Technology.
In the short term a bigger impact on Asian fuel trade has come from the relaxed crude import licences that has allowed China’s independent “teapot” refineries to increase their operating rates. Long lines of crude carriers have congested Qingdao port near the teapots’ heartland in Shandong province, accounting for nearly one-third of China’s crude imports in April.
“Usually you wouldn’t have such a dramatic increase in throughput and utilisation rates in your core refining capacity,” said Thomas Hilboldt, head of resources and energy research for HSBC in Hong Kong.
The chemicals and petroleum sector saw the highest number of positive responses among 10 sectors surveyed by the European Chamber of Commerce in China, in its business confidence survey released on Tuesday.
China’s two largest refiners, Sinopec and PetroChina, have cut output in the face of increased flow from independent rivals. PetroChina’s average run rates are now 80 per cent, down from more typical levels of 90 per cent.
Its new Kunming refinery will supply the underserved market of south-west China, displacing product from its Guangxi and Guangdong refineries into international markets.
The other Chinese refineries are increasing output despite declining demand for diesel, as a drop in coal demand and improved rail transports cuts into the number of heavy trucks hauling coal across the country. Because many are designed to maximise diesel production, they must keep operating rates high to achieve the same level of petrol and jet fuel output.
The result is a flood of diesel into Asian markets. Diesel exports hit their highest daily rate in April, at more than 300,000 barrels a day, following record monthly exports in March. The premium for diesel over crude prices hit a low of $8 a barrel in early April before recovering to a premium of $12 due to increased diesel demand from South Asia.
“China was a key driver of diesel demand growth over the past several decades but is now a net diesel exporter, contributing to the growing oversupply in global diesel markets,” the US Energy Information Administration said in a recent report.
That is despite the IEA’s higher expectations for Chinese fuel demand this year, after stronger-than-expected economic growth in the first quarter.
In a sign of the times, western oil majors are trimming their Asian exposure. Shell sold its share in a Malaysian refinery to a Chinese teapot but kept the local fuel distribution business and a deal to help purchaser Hengyuan Petroleum export diesel products from China.
Last year, Shell sold its 150-year old refining joint venture in Japan. Total is exiting its refining joint venture in Dalian, north-east China.