China's oil refining party at an end as capacity is cut
PetroChina and Sinopec realise that continually adding to supply is not the most profitable idea
Mainland refiners, like many before them, now realise that parties don't last forever and eventually everyone has to sober up.
The decision by state-controlled giant PetroChina to put off two new refineries and delay expansion of another is the latest, most dramatic signal that the mainland's refined fuels capacity has expanded too fast.
While it will no doubt continue to build refineries, the pace is likely to slow over the next few years, and new units will have to compete with other projects to secure funding.
This means refining economics will have to improve to justify the expense of building and operating costly plants.
Refiners are now travelling the same road large, global miners were forced on to in 2011, when investors realised that endlessly adding to the supply of commodities when the mainland's appetite was starting to taper was not a profitable idea.
Some may argue it took them too long, but eventually companies like BHP Billiton, Rio Tinto and Anglo American publicly announced they were reining in spending, cutting costs and returning more to shareholders.
Those three companies also changed chief executives, dumping dealmakers for operators as the focus shifted from expansion to running mines and other assets as efficiently as possible.
While executives at the mainland's state-run refining giants, PetroChina and Sinopec, are unlikely to lose their jobs, they are likely to be reviewing their expansion plans and re-assessing where their priorities lie.
PetroChina's decision to delay by two years the start-up of its 200,000 barrels per day (bpd) Kunming refinery to 2016, and a four-year delay to the 400,000 bpd joint venture Jieyang refinery to 2017 may be part of the process. The company will also delay the expansion of its Huabei refinery to 2015 from this year.
The mainland added about 250,000 bpd of refining capacity last year, and two refineries with a combined 440,000 bpd are scheduled to start up in the first quarter of this year. This will take total capacity to about 12.7 million bpd, with a further 3.16 million bpd still planned by 2020.
Yet, the mainland's implied oil demand rose at the slowest rate in more than two decades last year, gaining just 1.6 per cent to 9.78 million bpd.
This would mean that by the middle of this year there could be close to three million bpd of refining capacity not being used, and it is unlikely that demand will rise fast enough to justify the planned refineries.
CNPC, the parent of PetroChina, has forecast a demand rebound this year, tipping 4 per cent growth to about 10.36 million bpd, which equates to a gain of 400,000 bpd. Assuming that 4 per cent growth is the new normal for the mainland, this would put oil demand at just above 13.1 million bpd by 2020, when refining capacity is scheduled to be closer to 15.7 million bpd.
That 4 per cent growth figure for each year of the next seven may also be optimistic, given the mainland's economic growth rate is expected to ease.
It seems inevitable that the mainland will have to further scale back its refinery expansion plans, unless it is intending to become a major player in the global market for refined fuels.