Steel, aluminum, cement, what will China flood the world with next?

Oh yes, refined petroleum products, or to be more exact diesel fuel is the prime culprit at the moment. According to the Financial Times, China has in the region of 100 million metric tons of excess refining capacity and is adding more.

A 10 mmt per year refinery in Kunming in southwest China accounts for about half the anticipated capacity expected to be added this year and, although demand for refined petroleum products is rising, slowing truck traffic means the country finds itself with more diesel fuel than it needs.

A combination of lower coal demand and improved rail transport is taking traffic off the roads even though demand for refined petroleum products remains robust.

China’s Refineries

But you cannot readily change the mix of products a refinery produces. It is a product of the plant design and the crude it is refining. Excess diesel is, therefore, a by-product of refineries producing and meeting demand for petrochemicals, aviation fuel and gasoline for automotive use.

Excess production is flooding southeast Asia and depressing prices for SE Asian refineries even though China’s two largest state-owned refiners, Sinopec and PetroChina, have cut output in the face of increased flow from independent rivals.

Can China Truly ‘Cut’ Capacity?

PetroChina’s average run rates are now 80%, down from more typical levels of 90%, the FT reports. And therein lies much of the problem. If all refiners were in the state sector there is something the state could do about it, but like steel where China has been complaining stridently that at least 50% of the sector is in private hands and therefore cannot be ordered to close, refining is in a similar position.

The independent teapot refiners as they are rather charmingly named, are not to be tamed by Beijing’s entreaties to cut back and simply sell abroad what they cannot sell at home. Much like the steel sector, slowing domestic demand is not a signal to cut back, it is almost an incentive to invest in bigger plants with lower unit production costs to continue to compete.

From being a net importer of diesel and other refined products, following massive investment in refining capacity, China is becoming a net exporter. That’s damaging prospects for refiners as far away as Saudi Aramco in the Middle East, for whom China was the single largest export market

• [Editor:zhang yuan]