--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 3 Chinese refiners,
like many before them, have finally realised 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 China's refined
fuels capacity has expanded too fast.
While China 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 onto in 2011, when investors caught on to the
fact that endlessly adding to the supply of commodities when
China's appetite was starting to taper wasn't 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 state-run Chinese 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
the 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.
A joint venture with Royal Dutch Shell and Qatar
Petroleum to build a 400,000 bpd refinery in Taizhou also
appears to have stumbled, with the Anglo-Dutch multinational
reported to have pulled out.
BP is dropping plans to invest in a refinery in China
as well, concerned about slow fuel demand growth amid a bounty
CAPACITY ADDITIONS OUTSTRIP DEMAND
China added about 250,000 bpd of refining capacity in 2013,
and two refineries with a combined 440,000 bpd are scheduled to
start up in the first quarter of 2014.
This will take total capacity to about 12.7 million bpd,
with a further 3.16 million bpd still planned by 2020.
Yet, China's implied oil demand rose at the slowest rate in
more than two decades in 2013, gaining just 1.6 percent to 9.78
This would mean that by the middle of this year there could
be already close to 3 million bpd of refining capacity not being
used, and it's unlikely that demand will rise fast enough to
justify the planned refineries.
CNPC, the parent of PetroChina, did forecast a rebound in
oil demand in 2014, tipping 4 percent growth to about 10.36
million bpd, which equates to a gain of 400,000 bpd.
Assuming that 4 percent growth is the new normal for China,
this would put oil demand at just above 13.1 million bpd by
2020, when refining capacity is slated to be closer to 15.7
That 4 percent growth figure for each year of the next seven
may also be optimistic, given China's economic growth rate is
expected to ease as the country tries to rotate from being
reliant on fixed-asset investment to consumer spending.
It seems inevitable that China will have to further scale
back its refinery expansion plans, unless it's intending to
become a major player in the global market for refined fuels.