Caixin
Mar 24, 2020 05:56 PM
BUSINESS & TECH

Plan to Set Up Huge Refinery May Not Save Eastern Province’s Refining Industry

East China’s Shandong province is home to a vibrant community of private refiners. Photo: IC Photo
East China’s Shandong province is home to a vibrant community of private refiners. Photo: IC Photo

More details have been released about Shandong province’s plan to dismantle several low-profit oil refineries and establish a new refining giant to tackle oversupply and improve dwindling profit margins. However experts suggest that intense competition in China’s petrochemical market may make finding customers difficult.

The eastern province, which is home to 37 oil refineries with a total capacity of 130 million tons annually, wants these mostly privately owned oil refineries to shut down and sell their state-approved refining quota to a new company — Shandong Yulong Petrochemical Ltd. — based on Yulong Island, a manmade island off the coastal city of Longkou.

A total of 1,428 hectares (3,528 acres) of land on Yulong Island will be handed over to the project at a total cost of cost 5.87 billion yuan ($827 million), part of which will be spent on expanding the manmade island, according to a report on the project’s environmental impact released by the local government on March 9. The first phase of the project will involve 20 million tons of refining capacity and 3 million tons of ethylene production annual. The goal is for Yulong Petrochemical to eventually have around 40 million tons of refining capacity.

How many refineries have agreed to join the new venture and when, if ever, the new company will begin operations is unclear. The Shandong government has given the plan the go-ahead, but approval hasn’t yet been received from the state-owned assets administrator, which allocates refining capacity quotas and must give the green light to every new oil-refining project.

The provincial government decided in 2018 to reduce the region’s refining capacity by 40 million tons to around 90 million tons by 2025, as profit margins continue to shrink, declining to 3.5% last year. However, nationwide refining overcapacity is set to rise further this year to 170 million tons, according to research from the CNPC Economics & Technology Research Institute.

The biggest challenge facing Yulong Petrochemical will be finding customers for its products, said Zhou Xiaoyi, senior market analyst at S&P Global Platt.

A refinery’s success relies on stable downstream demand, which for Chinese refineries usually comes from their shareholders. Hengli Petrochemical, which has 20 million tons of annual capacity, is majority owned by Hengli Group Co. Ltd., which specializes in producing chemical fibers for which refined oil is a key ingredient. Zhejiang Rongsheng Holding Group, which invests in petrochemical, logistics and real estate businesses, holds a 51% stake in Zhejiang Petrochemical, a refinery with 40 million tons of capacity.

However, the biggest shareholder of Yulong Petrochemical is metal manufacturer Nanshan Group Co. Ltd., with a 71% stake. It produces aluminum products and operates wool textile and travel businesses, none of which generated petrochemical demand. Wanhua Chemical Group, which has a 20% stake, does however have some petrochemical interests.

Contact reporter Lu Yutong (yutonglu@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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