China’s Oil Industry Weighed Down with Refining Overcapacity

As a global hub of activity, China boasts one of the biggest economies on the planet. It has the largest manufacturing market in the world, and is also the biggest exporter of general goods. This is backed by the fact that it boasts the world's fastest growing consumer market. Yet despite its scope, new research is suggesting that China has flooded its own refined petroleum products industry, and is now pushing its diesel into international markets.

At the end of 2015 the CNPC Research Institute of Economics and Technology reported that China had around 710 million tonnes of refining capacity. Now, the opening of a 10 mmt per year Kunming refinery set to boost this figure by 100 million tonnes in 2016. The Financial Times maintains that this site alone will contribute around 50% of 2016’s additional capacity.

A ‘perfect storm’ for oversupply

So why is China churning out more than it can consume, or sell off? While demand for refined petroleum products is on the rise, slowing truck traffic means the country is unable to distribute its resources efficiently. Lower demand for coal and improved rail transport systems are driving traffic off the roads, which means producers are stuck with more petroleum than they can sell on the domestic market. This is despite the fact that Sinopec and PetroChina, China’s two largest state-owned refiners slashed output following increased flow from independent rivals. In fact, the Financial Times revealed that average run rates for PetroChina are now 80%, a figure that’s 10% lower than usual.  

‘Teapot’ refineries flood domestic market

If all refiners followed suit, analysts assert that the oversupply could be managed. Yet as much of the sector is in private, they can’t be ordered by the government to close. This means that independent ‘teapot’ refiners continue to overproduce, and flood the market. The trend has seen oil refining join steel, coal and aluminium in the line-up of Chinese sectors currently suffering from domestic overcapacity, and infiltrating global markets as a result.

Despite oversupply, the refining and petrochemicals industries remain keynote sources of income for Chinese industrialists. ‘High-Purity, High-Durability Sampling: Mitigating Corrosion and Maintaining Precision in the Gas Delivery System’ explains recent legislative updates to emissions limits, and how they now require facilities to precisely monitor fugitive emissions levels while simultaneously calibrating analytical systems with high concentrations of corrosive gasses like H2S and SO2.