WHEN PetroChina Co began expanding a refinery in Hohhot, Inner Mongolia, late last month, industry watchers voiced concerns about an oversupply in the domestic refining market just when the economy may be showing signs of slowing.
China is forecast to add 30 million tons a year of new refining capacity, or 600,000 barrels a day, this year by building new plants and expanding existing ones. Annual capacity totaled 483 million tons at the end of 2009.
Supply of refined oil products could exceed demand this year by as much as 15 million tons, according to Gong Manying, head of marketing studies of China National Petroleum Corp, the state-owned parent of PetroChina. Excess refining capacity stood at 6 million tons a year at the end of 2009.
Gong, speaking at an industry forum in Shanghai earlier this month, said demand growth for refined fuel is likely to ebb sharply in the second half of this year. He cited slowdowns in auto sales, industrial production, the property sector and foreign trade.
He warned of more sluggish growth in demand for oil products ranging from transport fuels like gasoline and diesel, to fuel oil used in power plants and ships, to naphtha, a key ingredient in petrochemicals.
Growth in demand for refined oil products in the second half could contract to 4 percent from 14 percent in the first six months of the year, he said.
Although analysts generally agree the growth in demand this year won't be sufficient to absorb added capacity, some are skeptical about Gong's estimates.
"A number of major new refineries or expanded refineries won't start production until sometime in the second half, so the surplus this year may be only half of estimates," said Sinolink Securities analyst Liu Bo.
For example, expansion at PetroChina's Jilin refinery in northeast China isn't scheduled to start until the end of October, increasing the plant's annual capacity to 10 million tons from 7.5 million tons.
Output at PetroChina's Hohhot refinery will be expanded from 1.5 million tons a year to 5 million tons a year, or 100,000 barrels a day. The 7.8 billion yuan (US$1.1 billion) expansion project is slated to come on stream in 2012.
Another analyst said even a surplus of 15 million tons may not be so huge, given China's annual consumption of over 200 million tons.
"A surplus for gasoline and diesel can be effectively reduced should there is a small pick-up in demand," said the analyst, who asked to remain unidentified.
Exports surge
To address excess capacity, refiners could choose to lower utilization rates, while the government may also use the opportunity to phase out obsolete capacity. And for excess output, China may have to resort to export or find storage facilities.
Exports of the nation's refined oil products surged 52 percent to 9.5 million tons in the first four months of this year from a year earlier. For 2009, the export volume for CNPC and Sinopec, the two main state refiners, stood at 12 million tons.
Domestic media have suggested state-owned refiners maximize their profits by evading taxes in the processing trade - where the companies convert imported crude oil into refined products for export.
State oil firms are expanding their overseas trading networks, which could be used to sell surplus output. PetroChina last year bought Singapore Petroleum Corp in a deal analysts said that could provide a vehicle to sell fuel at international prices.
Fuel prices remain capped in China, though the government has loosened its grip on pricing. A significant rise in fuel shipments could erode profit margins in the refining industries of other nations.
But Cao Xianghong, an academician of the Chinese Academy of Engineering, has poured cold water on the idea of boosting exports of refined oil products.