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Most of the refineries are located in Shandong province, which can process 15 million tonnes (109.9 million barrels) of crude a year, including Shandong Dongming Petrochemical Group, the province’s biggest privately-owned refinery. Photo: Getty

China’s teapot oil refineries could become ‘money-printing machines’ amid crude price crash

  • Lower cost of crude oil raises prospect of large profits for small refiners, who have been struggling to stay afloat amid coronavirus outbreak
  • But weak domestic market due to virus-hit economy could scupper hopes for Shandong refineries, even after boost from cheap oil

The collapse in the price of crude oil has thrown a lifeline to China’s army of small private refineries, who have been battling multiple headwinds and struggling to stay afloat, industry insiders said.

A price war between Russia and Saudi Arabia, however, has provided timely respite, driving oil prices down and helping them ramp up production and potentially allowing them to tap the international finished oil market, should Beijing grant export licenses.

Most of the refineries are located in Shandong province, including Shandong Dongming Petrochemical Group, the province’s biggest privately-owned refinery which can process 15 million tonnes (109.9 million barrels) of crude a year.

Company executive Zhou Menghan said it is back at 100 per cent capacity and that its Singapore trading unit is busying arranging new shipments of low-price crude to China. “The low crude price is certainly good news,” Zhou said.

These “teapot” firms were toughing it out before the coronavirus epidemic hit China’s economy, due to cutthroat competition with bigger state-owned rivals, rising costs and weaker sales. The virus then forced Chinese factories to close and vehicles to be parked up for weeks, in another hammer blow for the teapots.

According to China Chemical Industry News, an industry newspaper, the average capacity rate for refineries in Shandong province dropped to 36.9 per cent in the last 10 days of February, the lowest in five years.

Now, however, Shandong’s private refineries are accelerating production, with overall capacity moving towards the normal range of 65 to 70 per cent, said Feng Xu, an oil analyst with consultancy Sublime China Information.

Feng said the average profit margin for Shandong refiners surged to 559 yuan (US$80.3) per tonne this week, more than twice as much as the 224 yuan margin last week, which could encourage the province’s 44 teapots to boost imports and refining.

If prices remain relatively low, the refineries’ combined capacity of 169 million tonnes (1.2 billion barrels), about a fifth of the country’s total, could generate profits of up to 41.2 billion yuan (US$5.9 billion) per year.

“They are rushing to place orders to take advantage of the low price,” Feng said. “The benefits will become clear from April when deliveries arrive.”

For Chinese refineries, it is particularly lucrative when the price of crude oil drops below US$40 per barrel. In the heavily regulated domestic market, retail prices for petrol and diesel are set by the Chinese government in reference to international crude prices. The bottom reference price is US$40 per barrel as China does not want to set prices so low it would encourage unnecessary consumption.

“A refinery becomes a money-printing machine when international crude price drops below US$40 per barrel,” an executive with a Chinese state oil company, who declined to be named, told the South China Morning Post.

The price of Brent crude, the international benchmark, was trading at US$34 per barrel on Thursday, down almost 34 per cent from US$51.18 price last Thursday, before the start of the Saudi-Russia price war.

However, despite the sharp decline in raw material costs, a weakening domestic economy thanks in part to the impact of the coronavirus means China’s small private refineries are not guaranteed to turn big profits.

Zhou at Shandong Dongming Petrochemical confirmed that sales prices for finished oil products were not high at the moment.

China first permitted private refineries to import crude oil in 2015, a policy that helped the teapots to become a new, albeit small, force in the global oil market. But it continues to enforce a strict finished oil product export quota system that largely excludes private players.

China’s Ministry of Commerce issued the first batch of quotas for 2020 in January, granting a combined export quota of 28 million tonnes (205 million barrels) exclusively to state-owned oil companies.

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