China Market Insider China's Refineries: All-Time High in Production Capacity Despite Declining Demand

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The production capacity of crude oil in China's refineries climbed to a new record high in June. Analysts see this as a sign of the rapid recovery of the Chinese economy. However, market observers and Chinese officials see the current overcapacities and the corona crisis as increased pressure to reform the country's oil processing industry.

Beijing/China - The refineries in the People's Republic are currently running at full speed. 57.87 million tons of crude oil were processed in China in June, an increase of 9 % compared to the same month last year. This is a new historical record, based on the latest data published in mid-July by the National Statistics Bureau in Beijing. China's imports of crude oil have also climbed to a new record high in June, according to preliminary statistics from the Chinese Customs Authority GAC. In total China imported 53.18 million tonnes of crude oil, 34.4 % more than in June a year ago.

At first glance, the figures read really well - if it weren't for the overcapacities in oil processing that have existed for years. It causes the functionaries even more headaches than temporary setbacks due to the corona virus. 'Overcapacity will be the dominant theme in the industry for the entire current year and in the long term,' warned Fu Xiangshen, the vice chairman of the China Petroleum and Chemical Industry Federation (CPCIF), as early as March. As a result, the profit margins of the Chinese petrochemical industry had already fallen by 13.9 % last year, the most severe decline since the global financial crisis in 2008.

While the record production in China's refineries is interpreted by many observers as another piece of the puzzle of the Chinese economic recovery, individual analysts warn that the boom is not sustainable. The price war on the oil market, which first broke out between Saudi Arabia and Russia in March, has led China's state-owned corporations and also private refineries to fill their tanks with cheap crude oil, they say.

While a number of new large-scale refineries in China this year will increase the country's processing capacity by a further 27 million tonnes to at least 887 million (Caixin estimate), global demand was already declining before the corona crisis began. A renewed increase in exports in the near future seems impossible at present.

Even in China itself, demand for fuels and other oil products did not grow at the same pace as before the start of the corona crisis. 'The increase in excess capacity comes at a time when growth in domestic demand is slowing down,' wrote the Chinese business magazine Caixin in January, i.e. before the economic consequences of the corona crisis were fully visible. Despite the encouraging recovery of the Chinese economy since the easing of corona measures in Beijing, the picture is likely to continue to cloud over for the whole of 2020. The concentration on large Verbund sites, which began in the past few years, will now finally become a 'general trend' in Chinese oil processing, believes the news portal Sina.com.

China's industrial policy has for years encouraged a gradual reduction in the production of petroleum products and an expansion of the petrochemical industry. There is still great demand for polymers, and China still has to import some specialty chemicals. The pressure to make progress with this restructuring in order to reduce the overcapacity in the production of petroleum products has now become even greater due to the corona crisis.

While credit lines, especially from smaller, private refineries, are gradually drying up in the wake of the crisis, the pressure for consolidation in the industry will also continue to grow. Already, 70 % of China's refinery capacity is concentrated in three regions - the Bay of Bohai in the north, along the Yangtze Kiang and in the Pearl River Delta in the south of the country.

Especially in the Pearl River Delta, capacities in China are currently growing. BASF, Exxon Mobil Shell and China's CNPC have built large Verbund sites there in recent years. The southern Chinese market is growing the fastest in comparison to the rest of the country, which is why the appreciation of the Guangdong province in terms of petrochemicals compared to Bohai and the Yangtze delta is very likely to continue even after Covid-19.

So while China's crude oil tanks are currently filling to the brim, oil tankers are stowing away in front of port entrances and the production capacity of individual refineries was ramped up to 130 % in June, many analysts are expecting a significant slowdown in the second half of the year.

'If China's refineries do not find enough foreign buyers for their processed oil products, which exceed domestic demand, this could lead to reductions in oil processing in the second half of 2020,' writes raw materials expert Clyde Russel of Reuters. It is therefore possible that soon it will not be production capacity records that make the headlines, but long overdue structural reforms.

* Henrik Bork, long-standing China correspondent of the german daily newspaper ‚Süddeutsche Zeitung‘ and the ‚Frankfurter Rundschau‘, is Managing Director of Asia Waypoint, a consulting agency specializing in China and based in Beijing. 'China Market Insider' is a joint project of Vogel Communications Group, Würzburg/Germany, and Jigong Vogel Media Advertising in Beijing/PR China.

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