While China’s coal miners and steelmakers face production and workforce cuts, the country’s push to shrink industrial overcapacity has so far spared oil refining.
China’s expanding refining industry can already provide one-third more fuel than the country can currently consume, Fu Chengyu, former chairman of Asia’s largest refiner, China Petrochemical Corp., said this month in Beijing. About one-quarter of the country’s refiners will be idle this year, according to consultant FGE and the research arm of China National Petroleum Corp., the nation’s biggest energy company.
“There is indeed an overcapacity problem haunting China’s refining sector” said Gordon Kwan, head of Asia oil and gas research at Nomura Holdings Inc. in Hong Hong. “It will take time for China to reduce this excessive refining capacity.”
So far the country’s refiners have avoided pressure from President Xi Jinping’s drive to cut industrial capacity gluts amid reforms to state-run enterprises and a shift to a services-led economy. Oil processing is expanding and the sector has less capacity idle than coal or steel, where the government is seeking to trim unneeded output.
China said last month that it would layoff about 1.3 million workers in the coal industry and 500,000 steel workers. The country is seeking to cut within five years about 9 percent of its coal mining capacity and as much as 13 percent from steel making.
“The overcapacity in the refining industry is worse than that in steel” because capacity is still being added while demand growth slows, Fu said this month in Beijing, according to the China Securities Journal. “There are no industry wide losses, so the pressure on overcapacity is not as urgent.”
China, the world’s second-largest crude consumer, raised oil refining last year by 3.8 percent to a record 522 million metric tons, or about 10.48 barrels a day, according to data from the National Bureau of Statistics. CNPC estimated in its annual research report that the country will have total refining capacity of 720 million tons by end of this year, while only processing about 549 million tons. That leaves roughly 24 percent of its refining facilities idle, compared with about one-third unused capacity for both coal and steel.
Unlike coal and steel, demand for oil is still growing. Crude use rose 5.6 percent last year, while consumption slipped 3.7 percent for coal and 5 percent for steel.
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Refining capacity will expand by 16.4 percent in the five years to 2020, outpacing the 15 percent growth in oil product consumption, according to Chen Rui, a director at CNPC Economics & Technology Research Institute. Diesel will make up 90 percent of the surplus at the end of the decade, according to Chen.
The government’s move late last year to stop lowering retail fuel prices when oil drops below $40, which kept domestic prices higher than international rates, suggests policy makers are “quite protective” of the refining industry, said Tian Miao, an analyst with North Square Blue Oak Ltd. As a result, the industry may continue to expand, resulting in more product exports, lower utilization rates and flexible working hours to avoid cutting employees, Tian said.
China’s annual refining capacity may reach 900 million metric tons by 2020, from about 750 million tons last year, according to Fu. Diesel consumption peaked in 2014 — four years earlier than projected — and gasoline consumption may do the same by 2020, also years ahead of schedule, he said.
“China’s refining sector will see severe oversupply if our country doesn’t do anything now to stop it,” Chen Liguo, general manager of the refiner’s Beijing retail unit, said during a briefing at the annual National People’s Congress meeting on March 8. Waiting several years to start managing the glut instead of facing it now increases the chance it may cause “social problems” in the future, he said.
China’s independent refiners, known as teapots, risk having to lay off millions of workers if they’re shut down, said Nomura’s Kwan. These smaller refiners account for about 28 percent of the nation’s total capacity, according to ICIS-China, a research company.
“The government is now focusing on woes in the steel and coal industries, so it probably won’t extend worker layoffs to the refining sector in the near future,” according to Tian.
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