China’s Overcapacity Drive Faces Stubborn Oil-Refiner Revival

av3cvbk7w48wt83xhefwptek_media_dl_1.png International Energy Agency

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(Bloomberg) — China’s oil refining sector is once again showing its knack for survival just as Beijing seeks to tackle industrial overcapacity.

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Of three small refiners in Shandong province that went bankrupt last year, one has resumed operations under a new owner and the other two are in talks that could see them return, according to people familiar with the matter. All are seeking crude-import quotas from the central government, they added.

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The revival comes as China vows to curb excess capacity across industries such as steel and solar, which has stemmed from factors including export-focused manufacturing and government subsidies. The issue is particularly pertinent to oil refining as the sector grapples with a likely peak in the country’s gasoline demand due to the uptake of electric vehicles and slowing diesel growth.

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Prior to the bankruptcies in 2024, the three refiners were owned by state-run Sinochem Group Co. Independent operator Weifang Hongrun Petrochemical Co. acquired Shandong Changyi Petrochemical Co. this year and restarted operations in late June using domestically produced crude, according to traders and analysts who asked not to be identified as the matter is private.

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Talks to acquire the other two — Zhenghe Group Co. and Shandong Huaxing Petrochemical Group Co. — are ongoing, the people said, declining to elaborate on the buyers. They added that the timing of their restart was unclear.

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The long-term survival of the three refiners will likely hinge on crude-import quotas from Beijing, giving them access to cheaper oil, such as from Iran, that will help mitigate razor-thin margins. The central government has a long history of trying to consolidate the so-called teapot sector, but local government support and the exploitation of tax loopholes allowed them to thrive.

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“The Shandong teapots have proved incredibly resilient,” said Michal Meidan, the head of China Energy Research at the Oxford Institute for Energy Studies. “Local governments and local financial institutions are heavily invested in the survival of their industries, at least until new growth drivers emerge.”

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A Weifang Hongrun representative confirmed the acquisition of Changyi in March and said the refiner is in the process of applying for a quota to import crude, without elaborating. A spokesperson for Changyi confirmed the transaction, but declined to comment on import allocations.

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Emails to Sinochem’s press office were unanswered, and nobody from the National Development and Reform Commission, and Ministry of Commerce replied to a fax seeking comment. 

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‘Questionable’ Economics

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Changyi is seeking a crude-import quota of as much as 100,000 barrels a day, according to the people familiar. Collectively, the three oil refiners are asking for an allocation of up to 300,000 barrels a day, but the central government has yet to make a final decision, two of them added.