China’s small refiners cut output as soaring crude bites

SHANGHAI--China’s small- and medium-sized refineries are being forced to cut production or shut down operations in the face of soaring international crude prices, which were eating into their margins, said analysts and an industry source on Thursday.

Operating rates at these refineries are currently at 46.4%, said the industry source.

With global oil prices continuing to surge amid continued political unrest in parts of the Middle East and north Africa, refiners are dealing with unabated uptrend in crude processing costs.

In China, crude processing cost increased to yuan (CNY) 5,650/tonne ($861/tonne) in March, up CNY 300/tonne from February, with refiners’ profit shrinking to CNY 80/tonne from more than CNY 400/tonne last month, the source.

Given government controls on domestic fuel prices, these refiners could not pass on the high cost to customers.

 “Profits will shrink further in early April as international crude oil prices would continue their uptrend for a long period. The loss for refineries will not be larger if the country increase fuel oil immediately,” said an industry analyst.

US crude futures were trading above $100/bbl on Thursday.

China reviews its domestic fuel prices at a 22-day interval, relative to the behaviour of oil prices in the international markets. An adjustment in domestic prices may be triggered if international crude values surged or fell by more than 4% over 22 days.

China last adjusted its fuel prices on 18 February.

Another adjustment may be forthcoming this month or in April to save the small refineries from incurring losses, the industry source said.

China may see tighter supply of fuel oil in the domestic market at a time of strong demand from the agriculture sector, as ploughing season will begin soon, he added.

Spring ploughing usually extends up to May in China.

For the major refiners such as PetroChina, Sinopec, Shenyang Petrochemical and Shanghai Petrochemical, their profitability is being buffered by their stable long-term contracts, said an analyst from China Galaxy Securities, who declined to be named.