A Chinese proverb predicts that “Like tea, a true warrior shows his strength in hot water”. It’s a folksy reminder too for China’s 31 independent refiners, known locally as ‘teapots’ because of their small size compared to the four state-owned giants: PetroChina, Sinopec, CNOOC and Sinochem.
Zhang Liucheng, vice chairman of China’s largest teapot, Dongming Petrochemical, used a different analogy recently. He told an industry conference that the independents once considered themselves as wolves to the national champions’ tigers, but that the situation has been turning against them. “The big four tigers remain,” he explained. “But new, fiercer wolves are emerging and transforming us into sheep.”
About 80% of these smaller refiners are based in Shandong province and they account for about a quarter of the country’s refining capacity. The government gave them a lift in 2015 when it granted them their first import quotas. It hoped that greater competition would push the big four to become more efficient. Instead, it created a supply glut and the central authorities lost some of their enthusiasm for the newcomers. Earlier this year it decided not to roll over the export licences it first granted them in 2016.
The smaller refiners are being squeezed on multiple fronts. They are unable to sell their excess capacity overseas and are being pressured into more costly production methods at home to meet stricter environmental standards (i.e. less sulphur output). They are under attack from the state-owned giants too, which are feeling more confident after four years of corruption probes – plus they face a challenge from a new breed of independents from the eastern seaboard, like Rongsheng Petrochemical and Hengli Petrochemical.
Rongsheng is leading a consortium spending $24 billion on the construction of a refinery that will rival the world’s biggest plants. When it is operational in 2018, it will produce 10.4 million tonnes of paraxylene and 2.4 million tonnes of ethylene per year.
The teapots operate much lower down the food chain. A typical teapot produces about three million tonnes of final product per annum. According to the Oxford Institute for Energy Studies, about 55% of output is petrol.
Dongming – founded by Li Xianping (see WiC328) – is leading the wolfpack’s fightback. In 2016, it organised a loose federation of about 20 of its smaller peers, but failed to get much traction. This month, it registered a new company, Shandong Refining and Chemical Energy Group (SRECG), in association with a provincial government fund and about half a dozen local independents including Shandong Qingyuan and Shandong Tianhong. Each producer will operate a separate profit and loss account, but the combined entity will pool purchases of inputs, some production costs, and transportation and marketing expenses in a bid to secure economies of scale.
Insiders query whether the new consortium will hold together long enough to be more successful than 2016’s failed initiative.
“A stronger refiner will prefer to buy feedstock at a lower price than the average paid by peers,” one doubtful analyst told S&P Global Market Intelligence.
Another danger is that refiners may start to shoulder retail consumption taxes rather than the current wholesale tax. The existing tax setup has “allowed the teapots to discount their products” but any review “would lead margins to compress significantly,” the Oxford Institute for Energy Studies predicts.
The institute says the independents have survived worse during their short histories, citing capacity utilisation at around the 30% mark.
It also points out that the refiners are important partners to their provincial governments. Their tax payments go straight into local coffers rather than the central government and account for about 19% of Shandong’s industrial take, for instance.
That means that the institute believes that Shandong’s government will pull strings to help SRECG get an export licence in 2018. And if the plan works out, the group will have a combined output of 32.6 million tonnes per year, putting it on a par with CNOOC and Sinochem.
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