China’s Oil Refiners Face Low Profits, Run Cuts on Fuel Glut

(Bloomberg) -- China’s private and state-owned oil processors are grappling with lean or even negative margins due to the start up of a new mega-refinery and the slowdown in consumption of fuels such as diesel. 

Many private refiners, or so-called teapots, are facing losses from turning crude into fuels and petrochemicals this month, said traders. That’s despite their use of cheaper feedstock comprising sanctioned crudes from Iran, they said, without elaborating on the companies affected. Teapots account for about a quarter of China’s refining capacity.

The government-owned firms that dominate the market, including China Petrochemical Corp. — or Sinopec — and Sinochem Group, are also processing less crude at some plants. More than half of about 60 state refineries surveyed by Mysteel OilChem are expected to cut operating rates in October, the local consultancy said in note earlier this month. 

Government-linked processors don’t tend to import discounted Iranian crude due to fears of economic repercussions. 

Across China, refiners have been working on managing inventories of fuels such as gasoline and diesel for months, as a prolonged slump in consumer spending and the nation’s property crisis weigh on sentiment. Additionally, the market for transport fuels is under pressure from the rapid adoption of electric vehicles. Into this mix, the official launch of Shandong Yulong Petrochemical Co.’s much-anticipated mega-refinery in September is now cranking up competition among local players, particularly affecting the smaller teapots. 

In a bid to avoid domestic oversupply, local refiners produced less diesel and gasoline in September compared to the same period in 2023. Exports, which can help to relieve a domestic glut, have also tightened. Flows of both diesel and gasoline to overseas markets dipped last month due to a fall in profits, traders said. 

Run cuts are uncommon for this time of year as refiners in northern Asia gear up for winter demand of diesel and kerosene. Operating rates across Shandong, home to most teapots, hovered around 55% in October, data from Mysteel OilChem show. That’s slightly higher than the near four-year low hit in July, but down from over 60% in early-2024. 

Integrated refining margins for Shandong teapots have fallen 80% from the same period last year to 103 yuan ($14) a ton, according to OilChem. Profits on making diesel and gasoline are currently at or near five-year lows for the season. 

Runs at state refiners fell 6.7% in October from the same period in 2023, according to the consultancy. Sinopec has cut its crude throughput plan for this year by 7 million tons to 253 million tons, according to company filings. 

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This Week’s Diary

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