BUSINESS Shifting to high-end market not an easy job for teapots

BUSINESS

Shifting to high-end market not an easy job for teapots

China Daily

21:49, April 03, 2019

As China's independent refiners, or teapots, see their costs rising thanks to the country's new taxation system and higher crude oil prices, insiders are urging them to shift focus to the high-end market to avoid their margins being further crushed.

A bird's eye view of the Hengli Petrochemical Industrial Park in Changxing island, Dalian, Northeast China's Liaoning province. (Photo: Xinhua)

New tax rules implemented last year, including a $38 per barrel gasoline consumption tax and a $29 per barrel tax on diesel, have seen the fortunes of the country's some 40 independent refineries dwindle after several years of bumper profits since they were first allowed to process imported crude oil in 2015.

With new large-scale private refiners set to further squeeze their margins and step up competition, insiders said a shift to the high-end market is the only way out.

While the country is currently seeing overcapacity in the refining sector, most of the surplus is for low-end products, said Ren Zhufang from the China Petroleum and Chemical Industry Federation.

According to China National Petroleum Corp's Economics and Technology Research Institute, China's surplus oil refining capacity will increase by 120 million metric tons this year as more private refinery projects commence operations.

Total oil refining capacity in China this year is expected to be about 863 million tons, and the momentum has remained strong in the country for further expansion of refining capacity, it said.

Independent refiners could see their profits soar if they enter the high-end market, said Ren.

Tang Yanchuan, a researcher with China National Petroleum Corp, agreed saying the high-end market still has room to explore, like the shortage of basic organic chemical raw materials including arene and alkene.

China's refining companies are large in number but small in scale, and it's necessary to come up with a large-scale refining enterprise cluster to remain competitive, he said.

Li Li, energy research director at ICIS China, said while ideally the independent refiners can shift to producing more high-end products, expediting refining and chemical integration with cleaner and higher-quality products and high-end petrochemicals to avoid their margins being further crushed, small-sized teapots, which are not capable of stepping up scale in production with further investment, will still be weeded out in the future.

The capacity of independently run firms, most of which are based in the eastern province of Shandong, tend to range from 20,000 barrels per day to 100,000 bpd.

The teapots have seen their refining capacity boosted enormously since the government gave them the right to use imported crude oil and the right to import crude oil in 2015.

They imported 11.52 million tons of crude oil in January, a year-on-year increase of 27.7 percent and higher than market expectations, according to a survey released by S&P Global Platts.

The teapots' refining capacity reached 287 million tons last year, with those located in Shandong accounting for 63.16 percent, followed by those in the northeastern and northwestern regions.

Li said shifting to the high-end market, which requires a lot of capital investment, is no easy job.

"To shift to the high-end market is only an ideal solution for some teapots as it needs large capital expenditure," she said.

"The banks are also hesitant whether to give loans to teapots for such large fixed asset spending because of the uncertain prospects," Li added.

Some independent Chinese refineries aim to build petrochemical complexes in Shandong, trying to join an investment boom in China, the world's top chemicals market.

Wang Lu, an Asia-Pacific oil and gas analyst at Bloomberg Intelligence, forecast expansion for the refinery sector in the next few years.

"China will see its refinery capacity boosted in the 2019-21 period and refiners are gearing up to produce higher-quality fuels with less sulfur to reduce pollution," she said.

"Chinese exports of refined oil products will also surge in 2019-21, pressuring Asian refining margins," Wang said.

Wang forecast that China will have a three-year period of rapid refinery expansion in 2019-21, during which the country will likely add capacity of 3.1 million bpd.

China's refining capacity may increase by 890,000 bpd in 2019, a growth of 6.1 percent compared with the previous year, the highest since 2011, Wang said.

"Private enterprises such as Zhejiang Petrochemical, Hengli Petrochemical and Shenghong Group have been constructing sizable oil refineries, and these are expected to increase capacity by 1.52 million bpd in 2019-21," she said.

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