January 09, 2025 [The Business Times]- China’s independent oil refineries face a reckoning this year as Beijing tackles overcapacity in the industry, and the crude they rely on becomes a lot scarcer.
Over a fifth of the country’s oil refining is handled by smaller, privately owned outfits, many of them housed in the eastern province of Shandong. These independents, dubbed teapots, have a reputation as wily operators used to navigating razor thin margins. Some may now be at a tipping point where none of their old tricks to stay profitable will work.
China is the world’s biggest crude importer and the teapots are a cornerstone of a market that has driven gains in global oil demand for over a decade. But three firms in Shandong went bankrupt late last year and more company failures are predicted.
“This year, oversupply in China’s oil market will grow further,” said Mia Geng, an analyst at industry consultant FGE. “We could see more teapot shutdowns, both temporary and permanent.”
The teapots are at this pass because China’s economy is slowing and getting greener. Blame electric vehicles, but demand for the fuels they produce, such as petrol and diesel, is shrinking. Fiscal constraints mean that local authorities are no longer willing to shield them from their tax responsibilities. And tighter restrictions on cheaper, sanctioned oil from places such as Russia and Iran is choking off much of their supply.
China’s attempt to shift its economic growth away from smokestack industries has seen refiners saddled with a nationwide capacity cap of one billion tonnes a year for 2025. Room has been made for super-efficient, integrated mega-refineries such as the Shandong Yulong Petrochemical facility that began operating in September, which means that smaller, less profitable outfits are likely to be the casualties of meeting the target. Older teapots in Shandong are top of that list.
Researchers at state-owned Sinopec, the country’s biggest refiner, said consolidation could force another six million to 10 million tonnes of capacity to close nationwide this year, according to a presentation in Beijing last month. London-based Energy Aspects had earlier put the figure at 15 million tonnes, calling 2025 “the natural time to pile more pressure on teapots”, according to a note to clients in November.
Tax take
Other government directives on energy efficiency include shutting smaller crude distillation units – the first step in refining oil – by this year. About nine million tonnes of capacity in Shandong alone meets the threshold, according to Wang Yanting, an analyst with Chinese consultancy JLC.
Beijing’s need to broaden its tax take also has implications for a sector notorious for skirting its obligations. About 40 per cent of petrol and diesel sold by teapots was not properly taxed last year, according to research from China National Petroleum, the nation’s biggest oil company.
In September, the Shandong government gave an oral notice to teapots asking them to return some tax rebates on their fuel oil imports, said sources familiar with the matter, who declined to be identified discussing a private matter. Fuel oil is an alternative for smaller plants that do not have access to the government’s crude oil import quotas, and makes up about 10 per cent of the feedstock used by teapots, according to Mysteel OilChem.
Shandong’s government did not respond to calls seeking comment, so it’s unclear whether the request became an order or how many firms complied. But the attention on taxation is a worrying sign given that the province, which depends on refining for employment and economic output, has typically treated the teapots with forbearance. The fear in the industry is that more stringent tax accounting could impact many firms’ profitability, sending them into the red.
In fact, the three firms that went bust last year, which had a nameplate capacity of about 17 million tonnes, did so precisely because they were tax compliant, and because they shunned sanctioned oil, according to the sources familiar.
Teapots rely on cheaper Iranian crude and take around 90 per cent of its exports, but prices have risen and the flow has dwindled since the US broadened sanctions in October on the dark fleet tankers that ply the trade between Iran and China.
It’s a dynamic that will only worsen if the incoming Trump administration adopts an even more hawkish posture on trade with Iran. Beijing might be “willing to sacrifice the teapots to score some easy points against Trump by clamping down Iranian imports”, Energy Aspects said.
Teapots are already running at 55 per cent or less of capacity, according to Mysteel OilChem, and are likely to shrink runs even further, or shutter plants for maintenance for longer, in order to cope with the squeeze on margins.
Industry executives and traders say some of these firms would have struggled to survive without favourable taxes and the availability of sanctioned crude at a discount.
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