Shandong teapot refineries will start to feel the crunch in 2015

China’s small, independent “teapot” refineries, located mostly in Shandong province, will see less expansion in 2015 than they have seen in previous years due to slowing domestic demand and tightening bank credit.

These teapot refineries, which are between 20,000 and 100,000 barrels per day (bpd) in size, represent one-fourth of China’s total refining capacity. They compete with China’s larger, more efficient state-owned refineries. Their combined capacity is 152.15 million metric tonnes per year (MTPY). However, their utilization rates last year were below 38%, according to JYD Commodities Hub in Beijing, from 41% in 2013.

These teapot refineries are an anomaly, because some have continued to expand, despite being underutilized, to escape being closed by the government, which has mandated that smaller plants be closed. The total combined primary distillation capacity increased by 21.70 million metric tonnes (MT) last year. Of the newly built capacity, only 35% are operational while the rest have not been commissioned.

But with tightening credit and a slowing Chinese economy and a slowing demand for oil, their growth is expected to slow down this year too. Nevertheless, about 11 million MT is said to be under construction in Shandong province, including a 3 million MT crude distillation unit at Luqing Petrochemical which is expected to be completed in March; a 2.1 million MT unit at Yatong Petrochemical which is expected to be completed in 2016; and. 14.2 million MT of capacity at Luqing’s new crude distillation unit that was completed last year but has not yet been commissioned.