China Targets Oil Refining Overcapacity with Facility Upgrades

The Chinese government is taking decisive steps to address overcapacity in its oil refining and petrochemicals sectors. Plans are in place to reduce the number of refiners and upgrade outdated facilities, which currently make up approximately 40% of the country’s total refining capacity. According to Bloomberg, sources familiar with the government’s strategy indicated that some smaller refineries will be shut down while others will undergo retrofitting to enhance production capabilities.

The shift in focus will encourage refiners to prioritize the production of specialty chemicals, rather than bulk refined products that have seen a significant oversupply. Demand for specialty chemicals is more robust, particularly in sectors like artificial intelligence, biomedical devices, robotics, semiconductors, and alternative energy. This strategic pivot aims to align production with market needs and reduce the surplus that has plagued the industry.

As the world’s leader in oil refining capacity, China currently boasts a capacity exceeding 21 million barrels per day as of 2024. However, experts from Wood Mackenzie predict that this extensive capacity may not be sustainable over the next decade without significant reductions. The consultancy estimates that around 10% of China’s refineries could close by the end of 2034 due to ongoing challenges, including price wars that have impacted profitability across various sectors.

In the first half of 2025, losses within the refining and petrochemicals industry increased by 8.3% compared to the same period in the previous year, driven by overcapacity and competitive pricing pressures. Specifically, losses in the refining segment surpassed $1.25 billion (approximately 9 billion Chinese yuan), marking a concerning trend for an industry that has struggled to adapt to changing economic conditions.

Interestingly, the solar power sector faces similar challenges with overcapacity. This situation appears paradoxical, as solar and wind energy were anticipated to replace oil and gas. Yet, an aggressive expansion in refining capabilities has led to significant growth in solar capacity as well, resulting in price wars and numerous company failures, contributing to approximately 87,000 layoffs in the previous year.

As China moves forward with its plans to streamline the oil refining sector, the implications will extend beyond the industry itself, affecting global supply chains and energy markets. The government’s commitment to modernizing facilities and shifting production focus may help stabilize the sector and align it closer to future market demands.