Diversify or die: China's independent oil refiners adapt to new challenges

Tue Apr 11, 2017 6:11am EDT
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By Chen Aizhu

BEIJING (Reuters) - Cut off from lucrative fuel export markets and seeing their margins squeezed by new taxes, China's independent oil refiners are branching out into new sectors from clean energy and lumber as well as expanding their trading to overcome the challenges.

These independents, known as "teapots" since they are smaller companies than their state-owned rivals, are scrambling to survive shifting government policies at the same time domestic oil demand growth is slowing, undermining their ability to expand by just serving their home market. In 2016, China's annual fuel demand growth was at a three-year low.

"The good days won't last much longer, as China's oil demand has been shrinking," said Zhang Liucheng, vice president of Shandong Dongming Petrochemical Group, the country's largest independent refiner.

Late last year, Beijing suspended fuel export quotas for the independents, handing control of diesel and gasoline exports to the dominant state refiners.

Other government moves may also squeeze the independent's margins. Top state refiner Sinopec overhauled its fuel buying policy by centralizing all purchases at its Beijing headquarters and China plans to slap consumption taxes on refinery by-products such as light cycle oil, sold as diesel, and mixed aromatics, which are added to gasoline to improve fuel quality.

"They had already been diversified and nimble at working around the various government mandates...now they are definitely looking for ways to step up their game and have better people, global access and financing to do so," said Michal Meidan, analyst at consultants Energy Aspects.

Executives at some of China's top independent refiners outlined to Reuters their plans to diversify to endure these changes.

Dongming, for example, plans to add a 800,000 tons-per-year naphtha cracker, extending its business from transportation fuels to higher value plastics and synthetic rubber as well as fine chemicals, said Zhang.   Continued...

An oil tanker is seen inside Shandong Haike Group in Dongying, Shandong province, China January 11, 2017. Picture taken January 11, 2017. REUTERS/Aizhu Chen