With overcapacity in domestic oil refining, why are private enterprises still accelerating their capacity expansion?

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This post was last edited by liuquan1100 on 2017-12-15 at 16:19. According to media reports, the private enterprise Shenghong Petrochemical Group Co., Ltd. will build China’s largest single-unit atmospheric and vacuum distillation unit with a capacity of 16 million tons. Currently, only CNOOC’s unit in Huizhou and Sinochem’s unit in Quanzhou have a capacity of 12 million tons per year; this project will thus be the largest oil refining and petrochemical integration project currently under construction by a private enterprise in China. Given the current overcapacity in domestic oil refining, this incident is particularly noteworthy. 　　Coincidentally, earlier, two private enterprises, Zhejiang Rongsheng Holding and Tongkun Group, joined forces with Juhua Group, the parent company of a local state-owned enterprise in Zhejiang, to invest in a large petrochemical project in Zhoushan – Zhejiang Petrochemical. The project will be constructed in two phases, and upon completion, its crude oil processing capacity will be 40 million tons per year. China’s oil refining capacity is already “severely” overcapacity – why are private enterprises still expanding it significantly? 　　Many people ask whether, with overcapacity in the oil refining sector on one hand, and private enterprises rushing to build new oil refining projects on the other, this won’t lead to even greater overcapacity 　　In fact, the main problem in China’s refining industry at present is not overcapacity, but rather an excess of outdated production capacity. Phasing out outdated production capacity and promoting structural adjustment and industrial upgrading are also the policy orientations of **. At the same time, providing private enterprises with equal development opportunities and policy support to help them grow and become competitive, thereby creating a diversified competitive landscape involving state-owned enterprises, private enterprises, and foreign companies, is also a necessary condition for the healthy development of China’s refining industry. This is also the policy orientation for the development of China’s refining industry. 　　Enhancing the international competitiveness of refining companies is also an inevitable requirement for the development and strengthening of China’s refining industry. To this end, on the one hand, it is necessary to use advanced new technologies to build new refineries ； On the other hand, it is necessary to invest in and build large-scale refining projects, increase the scale of refining facilities, reduce production costs, and enhance cost competitiveness. Therefore, the faster large-scale oil refining projects are launched, the greater the overcapacity will be, and the faster smaller oil refining companies with outdated capacity will be phased out. From the perspective of the healthy development of China’s refining industry, this enables faster structural adjustments, optimization of refining capacity, and the advancement of the entire industry. Therefore, given the excess refining capacity in our country, it is not surprising that private enterprises are expanding their production capacity significantly. As long as their technology is advanced and their production capacity is competitive, there are no major issues, which in turn helps to promote the development of the industry. 　　In comparison, the pace at which state-owned enterprises are investing in and building large-scale refining projects has slowed down slightly at present. It is understood that on December 16, 2016, Sinopec’s Maozhan refining and chemical complex announced the start of construction, but the scale of the project was reduced from the original 15 million tons per year to 10 million tons per year. This is mainly because state-owned enterprises underwent rapid construction of new facilities as well as upgrades to their refining units in previous years, and as a result, the production capacity of each refinery has now largely reached a scaled level. To improve competitiveness, considering costs and the overall layout upfront, it is more reasonable to carry out modifications and innovations based on the existing production capacity. Some of the newly constructed projects are primarily aimed at rationalizing the strategic layout of the refining enterprises under state-owned companies. For example, filling the market gap of that company in a certain region to achieve reasonable optimization within the company. What are the positive implications of launching large-scale private-sector oil refining projects? 　　It is in line with the overall development trend of China’s refining industry. Firstly, it helps to further enhance the overall competitiveness of oil refining companies. The scaled development of private-sector refining capacity not only enhances the level of scale in China’s refining industry but also optimizes resource allocation, diversifies the sources for purchasing refining raw materials, and helps to phase out outdated production capacities. Secondly, it helps to accelerate integration with international standards and promote the marketization of China’s refining industry. The upgraded development of production capacity in private refineries helps to create a healthy market-based competitive environment within China’s refining industry, promotes the market-oriented reform of state-owned enterprises, and enhances the marketization level of this industry. Thirdly, it helps to enhance China’s energy security. Achieving diversified development in terms of both hardware facilities such as refining capacity and storage, as well as capital, by involving private enterprises, can enhance the development of China’s refining industry and improve energy security. 　　In short, the launch of large-scale refining projects by private enterprises not only exacerbates overcapacity in China’s refining sector, but it also helps to eliminate outdated production capacity, optimize the industrial structure, and drive industry upgrading. Of course, in addition to the scaled development and improved competitiveness of the refining industry, China’s refining sector also needs to optimize its overall layout. Across the country, refining should be developed where it is suitable based on regional advantages, while chemical manufacturing should be promoted in areas where it is appropriate. Once scaling up occurs, what is most important is to enable complementary strengths, rather than having all refining projects compete with each other in an attempt to maximize profits”