New refining capacity depressed margins for Chinese refiners, with profits down 42 percent on the year in 2019, Reuters reports, citing the China Petroleum and Chemical Industry Federation.
Capacity increased by almost 900,000 bpd last year but combined with weak demand and record-high run rates, this trend has pushed profits lower. This overhang in capacity will continue to pressure refiners' margins, the industry group said.
"For the full year and longer term, overcapacity will still be the dominant issue in the industry," the vice chairman of the CPCIF said.
Total refining capacity on the world's largest oil importer stood at 17.2 million bpd as of the end of 2019.
The coronavirus outbreak will not help matters, either. Demand for fuels has taken a severe beating since the start of the year, with refinery run rates falling to the lowest in six year last month, at around 10 million bpd, from close to 13 million bpd last year.
Chinese refiners, at least the private ones, are also facing a credit crunch because of the epidemic. According to unnamed Reuters sources, at least three private refiners, or teapots, have had credit lines to the tune of $600 million suspended by banks including French Natixis, Dutch ING, and Singapore DBS Group Holdings.
Even in this environment, the industry will continue building refineries this year as well, raising the already excessive total by another 3.1 percent, or 27 million tons.
"We have growing concerns over the overcapacity issue," CPCIF's vice chairman, Fu Xiangsheng, said. "With the launch of the integrated refining projects, production and sales rose but profits fell."
The immediate outlook is not too good, again because of the coronavirus epidemic. While there are reports that business activity in China is beginning to recover after the worst of the wave of infections subsides, it is anyone's guess how long this recovery will take, particularly with regard to fuel, hence oil, demand.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More