context: Demand for petroleum products is shifting from fuels to more advanced chemicals and products, as reflected in the structural transition of these major refineries. Overcapacity is a major issue in the industry, but authorities hope to rein it in by capping capacity at 1 bn tonnes per annum, per new policy in October 2023.
The Chinese refining and petrochemical industry has just experienced its lowest point of the past 30 years, amid global instability and industry overcapacity, according to 21st Century Business Herald. The worst of the crisis has, however, passed, according to the head of a private oil refining firm.
China’s six largest private refining companies recorded large losses through Q4 2022 and Q1 2023. Hengli Petrochemical was responsible for over half of the total profits of these six firms in Q1-3 2024, leading the pack. Hengli experienced a small decrease in prices of its products, but a larger decrease in the prices of its inputs, such as coal, butanediol and crude, leading to net profits.
Tongkun Group and Xin Feng Ming Group are more focussed on downstream products (compared to Hengli). Despite the easing costs of inputs arising from upstream capacity expansion, weak demand posed a major issue for these players.
Strategies will differ from firm to firm moving forward: Rongsheng, Shenghong and Hengyi are focussing on integrating refining with advanced chemical production and making large capacity additions, while Hengli is focussing on new materials. Tongkun and Xin Feng Ming are investing in plants in Indonesia.
The market changes caused by major investments and capacity expansions in refining will take years to equilibrate. A vicious cycle is occurring in which firms invest in new capacity to bring unit product costs, resulting in overcapacity and eroding the profits of midstream players.
The future of the PRC refining industry is determined by three factors, according to industry insiders
- capping of refining capacity associated with decarbonisation
- rising costs of investing in new plants
- the flexibility of advanced production technology means that petrochemical plants can produce a variety of products and adapt their production to demand in downstream market
The recent adjustments to oil consumption taxes will also accelerate the process of ‘survival of the fittest’ in the refining industry, according to industry insiders.