China's Refinery Industry Facing Upheaval: Small Plants Under Pressure

In the next ten years, up to 10% of China's oil refining capacity could be closed as the country's fuel demand has peaked earlier than expected. This development is putting pressure on refinery margins and causing the Chinese government to increasingly target inefficient, older, and smaller facilities. Stricter sanctions from the U.S., particularly under former President Trump, could also complicate access to cheap crude oil from countries like Iran, accelerating further closures. Downsizing in this industry is urgently needed, as the world's second-largest refinery industry has long struggled with overcapacity. This overcapacity arose during the decades of rapid demand growth. The electrification of China's vehicle fleet and stagnant economic growth are now forcing many of the weakest market participants to exit. China's crude oil imports, which account for eleven percent of global demand, declined by 1.9% in 2024—the first time since the COVID years. This decreasing demand has a dampening effect on global oil prices. The hardest hit are the independent refineries, the so-called "teapots," especially in Shandong. According to Chinese consultants, these operated at only 54% of their capacity in 2024. Meanwhile, more of these smaller facilities are turning to discounted oil, mainly from Iran. A potential increase in tensions between the U.S. and Iran could further pressure these independent players. China's government aims to cap nationwide refining capacity at 20 million barrels per day by 2025, making smaller players increasingly redundant. It is expected that between 2023 and 2028, capacities of up to 1.1 million barrels per day will be shut down, with further closures to follow by 2050.