Some teapot refineries located in the eastern Chinese province of Shandong are hoping to shift into petrochemicals, but analysts are concerned they will face massive challenges in logistics and funding.
Teapot refineries squeezed by increased tax scrutiny, ban on fuel exports
A number of teapot refineries in China are considering building petrochemical complexes to bolster their businesses and join an investment boom in the world’s largest chemicals market.
The independent refineries see the growth potential of petrochemicals as they struggle with tight cash flows and fierce competition in a saturated fuel market.
“The widely accepted notion among Shandong refiners is that if you don’t move into petrochemicals quickly enough you’ll die faster,” an executive at a Shandong refiner told Reuters.
According to a Reuters’ source, Shandong Shouguang Luqing Petrochemical Corp and Shandong Chambroad Group have both hired a state-run engineering firm to design a petrochemical plant which includes processing technologies. The engineering firms have also been required to determine capital spending estimates.
The source did not offer an details on what products the companies are looking at making or what size of plant they are considering building. The source did say that for a petrochemical complex to be competitive, it needs at least a 1 million tonne per year (tpy) ethylene plant and about a dozen units making other products, including polyethylene to aromatics.
Other teapot refineries are said to be considering similar projects.
A company executive with Wanda Tianhong Group told Reuters that their company is waiting for government feedback after submitting a proposal in March to build a 1.2 million tpy ethylene facility in the city of Dongying in Shandong province.
As well, a company official with Shandong Lihuayi Group says the company is looking at building a 1 million tpy plant which would make paraxylene, an intermediate for polyester.
Until recent changes in Chinese tax scrutiny and a ban on fuel exports, teapot refineries had banked high profits after they were allowed to process imported fuel in 2015. Growing competition from newer, larger private refiners has also cut into their profits.
Analysts say a shift into petrochemicals for these teapot refineries could cost at least $2 billion.
“Large state-owned banks will be reluctant to loan to teapots for such large fixed asset spending because of the uncertain prospects,” an executive at a Shanghai-based state-owned lender who funds teapots for oil imports told Reuters.
Location is also a problem for some small refineries as they are inland and do not have easy access to deep-water berths and are farther away from consumers.
“I doubt any teapot in Shandong can invest in big ethylene plants under current circumstances. It needs large capex,” Seng-Yick Tee of consultancy SIA Energy told Reuters.
Last week, Energi.news reported that in October, private chemical company Hengli Group will begin testing its oil refinery and petrochemical complex located in northeastern China near the port of Dalian.
The $11 billion plant will produce gasoline and diesel along with plastics and other chemicals and cut the demand for imports.
Exxon Mobil and Germany’s BASF have recently announced multi-billion dollar investments in Chinese petrochemical firms.