By Chen Aizhu
SINGAPORE, (Reuters) – Up to 10% of China’s oil refining capacity faces closure over the next decade as an earlier-than-expected peak in Chinese fuel demand crushes margins and Beijing’s drive to wring out inefficiencies from older and smaller starts to put pressure on factories.
Tighter enforcement of U.S. sanctions under the incoming Trump administration could push more factories into the red and accelerate closures by cutting off access to cheap crude oil from places like Iran, industry players and analysts say.
The world’s second-largest refining industry has long been plagued by overcapacity after expanding to take advantage of three decades of rapid demand growth.
Authorities, including officials in Shandong province’s independent refinery hub, have lacked the political will to close inefficient factories that employ tens of thousands of workers, analysts said.
However, the rapid electrification of China’s vehicles and slowing economic growth are rendering the weakest operators unviable, forcing a moment of reckoning.
The shakeout is likely to limit crude oil imports into China, the world’s biggest buyer, accounting for 11% of global demand. China’s crude oil imports fell 1.9% in 2024, the only decline in the past two decades outside of the COVID years, with weaker demand weighing on global oil prices.
Refinery production also showed a rare decline last year.
Poor operating figures are the clearest sign of the industry’s pain. Consultancy Wood Mackenzie estimates that Chinese refineries were operating at just 75.5% of capacity in 2024, the second-lowest utilization rate since 2019 and significantly lower than the U.S. refinery rate of over 90%.
Worst off are independent fuel producers, also known as teapots, which are mainly based in Shandong, eastern China, and make up a quarter of the industry. According to a Chinese consultancy, they operated at just 54% capacity last year, the lowest since 2017 outside of the COVID years.
Weaker players were effectively spotlighted by Beijing in 2023 when it pledged to destroy the smallest plants under a national refining capacity cap of 20 million barrels per day by 2025, currently just over 19 million barrels per day.
The smaller plants have become redundant after the start of four major private refineries since 2019, accounting for 10% of China’s refining capacity, industry players said.
Adding to their challenges, Beijing began going after independent refiners in 2021 over unpaid taxes.
Smaller operators, especially those that don’t qualify for Beijing’s crude oil quotas and instead survive by processing imported fuel oil, face further crisis as new tariff and tax policies will drive up their costs by 2025, executives say from the sector.