Small refineries struggling to stay afloat

A gas station in Fuyang, Anhui province. As the retail price adjustment frequency increases, profit of oil products trading is flowing to the end of the market like gas filling stations. [Photo/China Daily]

Under pressure from a plunge in world oil prices that began in June, small local refineries that were already grappling with a glutted market have seen their profits almost evaporate, and some may even close, industry sources said.

The price of one international trading benchmark, Brent crude oil, has declined by more than 55 percent in the past seven months to below $50 a barrel.

But Chinese refineries have not seen any benefit from this decline because of weak downstream markets and high inventories that had to be sold at lower prices, said Li Yan, an oil analyst with Shandong Longzhong Information Technology Co.

The consultancy is based in Shandong province, which has the largest number of refineries in the country.

"Affected by the falling oil price, domestic petrochemical companies and traders are also facing reluctant buyers, which caused profit declines for wholesalers and losses by refineries," Li said.

Since China revised its oil pricing mechanism, which is linked to international crude markets with an adjustment window of 10 days, the authorities have announced 12 retail fuel price reductions in a row, most recently last week.

According to the consultancy, the average wholesale price for oil was 8,855 yuan ($1,444) a metric ton in 2014, down 4.5 percent year-on-year, while the average wholesale price for diesel declined by 5.3 percent.

Li said many small refineries will go bankrupt if the crude price falls another $10 a barrel.

Xue Qun, refined oil analyst with Longzhong, said that in addition to price falls, other factors including rapid refining capacity expansion and China's economic slowdown contributed to the wholesale-level price declines.

"As the retail price adjustment frequency increases, profit from oil products trading is flowing to the end of the market like gas filling stations," she said.

The profit from petroleum retailing in domestic gas stations has grown 64 percent year-on-year on average for 2014, according to data from Longzhong.

Expansion of capacity at China's large refineries has slowed in the past five years. Capacity at those facilities is growing by about 5 percent annually, compared with as much as 9 percent from 2000 to 2010, according to energy consultancy ICIS-C1 Energy.

However, small and medium-sized refineries are still adding capacity at a rate of about 15 percent annually, said Li Li, research and strategy director at ICIS-C1 Energy.

"The global energy structure changed dramatically in 2014 as crude price declined substantially and pipeline crude supply from Russia expanded, which gave Chinese participants in the global crude market more choices," she said.

Chinese refineries will tend to buy higher-quality crude, given the widening range of suppliers. Thus, they will have a bigger say in price negotiations, Li Li said.

"In the coming five years, large refineries will survive while small ones may be eliminated."

There are also some challenges for refineries such as raw material procurement, products distribution and market strategies, she said.