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 <0386.HK><600028.SS> 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 Shelland 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.
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. [ID:nL3N0KN1F8]
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 million bpd.
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 million bpd.
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.
Source:
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
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 <0386.HK><600028.SS> 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
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 million bpd.
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 million bpd.
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.
