After petrol, China's oil refiners face a jet fuel glut
In the post-pandemic period, as flights returned to the skies, jet fuel was a boon for domestic refiners struggling with a sputtering economic recovery, the electrification of the car fleet and trucks turning to alternatives such as liquefied natural gas. Refiners piled into aviation, using up feedstock that in the past would have gone into road-transport fuels.
Now, though, there may be too much of a good thing.
Supply this year is already running over 40 per cent ahead of demand, according to data from analytics firm Kpler. In the long term, structural changes, like the build out of high-speed rail, stand to limit future growth.
'Jet was China's solution to demand destruction in gasoil and petrol, but all it did was shift the problem elsewhere,' said Zameer Yusof, a middle distillates analyst at Kpler, who forecasts a surplus of 390,000 barrels per day in the country this year. 'Chinese international travel looks weak, contributing to the glut we are seeing.'
Granted, consumption is set to keep climbing in 2025 as more aircraft take flight and a larger proportion of the population travels – but it's still short of the growth that the refining system needs to absorb the extra production.
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A pivot towards domestic travel in recent years, at the expense of international routes, has not helped, slowing the growth trajectory further. Other headwinds include an uncertain outlook for consumer spending, plus newer, more fuel-efficient aircraft and better management by airlines eager to trim the consumption necessary for each flight.
With 'limited options for relief', Chinese refinery margins will remain under pressure, Yusof said.
Export trouble
As with much of China's excess capacity, much of this may turn into a headache beyond its borders. Last month, Kpler forecast the nation's June exports would reach a record 2.6 million tonnes, potentially displacing flows into the region from the Middle East and India.
China's refineries have been struggling with paper-thin margins for years. China's diesel demand likely peaked in 2019, while the nation's electric-vehicle boom means petrol consumption may have crested in 2023, the chairman of top refiner Sinopec Group said in March.
Beijing has urged a shift towards making more petrochemical products – including ethylene, a key building block for many plastics – but that has done little to ease the financial pain.
'There is already too much ethylene-producing capacity in China,' said Manish Sejwal, a natural gas liquids analyst at Rystad Energy. 'This is all happening at a time when demand for ethylene remains clouded by a slowing global economy.'
The country plans to add six million tonnes of ethylene production capacity in 2025, and a further 20 million tonnes over the next three years, according to Rystad, taking total capacity to 70 million tonnes. Bloomberg
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