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150kbd of Chinese refining capacity could close by 2020

Approx. 150kbd (7.5Mnta) of refining capacity could close in China by 2020, due to a tighter operating environment, according to a recent analysis from Wood Mackenzie.

Independent refiners, in addition to squeezed margins due to higher crude prices and volatility in 2018, are affected by a new taxation system that requires online filing of fuel transactions. This has raised input costs and with the teapots struggling to sell leads to lower utilisation.

This has led to state-owned refiners benefiting with reduced competition and improved utilisation and margins. Currently, average utilisation for state-owned refiners is 78% and that for teapots is 58%. This compares with 90% in the US.

The quality parameters for refined products are also becoming stringent. At sea, China will extend three designated emission control areas along its entire coastline from January. In addition, the low IMO sulphur content limit is expected to be applied to vessels sailing within 12 nautical miles of the coast. On land, the government will nationally enforce the China VI (equivalent of Euro 6) fuel specification for both gasoline and automotive diesel.

The combined impact of these measures means Chinese refineries will need more investment and technology to upgrade, with inefficient plants having to close.