China should surpass the US as the world’s top oil refiner by capacity in the next couple of years. This distinction arrives as local demand falters amid an economic slowdown. Even when demand recovers, locals’ undying fascination with electric cars has emerged as a long term risk for local refiners.
China’s refining capacity is expected to increase to a record 17.1mn barrels per day this year just when it least needs it. Demand, and oil prices, have plunged in recent months. Local oil demand is expected to shrink for the year, the first time in two decades.
Strict Covid restrictions, including lockdowns, are partly to blame. Travel restrictions have slashed jet fuel demand for over the past two years. The World Bank now expects just 2.8 per cent economic growth this year in China, marking a sharp revision from its previous forecast of 5 per cent. This should mean weaker oil consumption as well.
European markets provide some relief. A winter gas shortage, which analysts expect to last until at least 2025, means imminent demand for Chinese refiners’ overflowing stock of diesel. Moreover, China’s export quotas for diesel and gasoline will go up from this quarter. This outlet should support operating margins for local refiners this year.
But longer term, the decline in transport fuel demand at home weighs as a bigger issue. China has already surpassed the government’s ambitious target of having 20 per cent of all new car sales as electric vehicles — two years ahead of its initial goal of 2025.
Electric car sales in China more than doubled in the first half and have hit a record 6mn cars sold through August, even amid lockdowns and an economic slowdown. China is the world’s biggest electric car market, accounting for nearly 60 per cent of global sales.
Shares of some of the biggest local refiners including Rongsheng Petrochemical and PetroChina have fallen more than 22 per cent in the past year partly reflecting demand concerns. Unfortunately, any hoped for economic recovery by refiners should also turbocharge the sales of their nemesis, electric cars.