Chinese petrochemical companies are working hard to address the issue of excess aviation fuel supply, which is further complicating an industry already facing declining demands for gasoline and diesel.
After the COVID-19 pandemic, with the resumption of flights, the increase in demand for aviation fuel is a positive development for petrochemical companies. However, these companies are struggling amidst a weak economic recovery, the electrification of automobiles, and the shift of trucks to liquefied natural gas and other alternative energy sources.
According to a report by Bloomberg, petrochemical companies are delving into the aviation sector, diverting raw materials that were previously used to produce road transport fuels. Yet, it seems that this move may have been excessive.
Data from analysis firm Kpler shows that this year’s aviation fuel supply exceeds demand by more than 40%. In the long run, structural changes in China’s transportation industry caused by high-speed rail construction will likely curb the future development of the aviation industry.
“Increasing aviation fuel production is China’s solution to the declining demand for diesel and gasoline, but it’s only shifting the problem elsewhere,” said Zameer Yusof, a fuel oil analyst at Kpler.
He predicts that China’s daily surplus supply of petroleum in 2025 will reach 390,000 barrels. “China’s international tourism industry seems weak, exacerbating the oversupply of aviation fuel that we are seeing now,” he said.
Although China’s aviation fuel consumption is expected to continue to rise in 2025, it is still not enough to absorb the additional production capacity in the refining industry.
In recent years, the Chinese petrochemical industry has been unable to rely on the expansion of international routes and has turned to domestic travel growth. However, this shift has not been fruitful and has instead further slowed down growth. Other unfavorable factors in the market include uncertain prospects for consumer spending, more fuel-efficient aircraft, and improved fuel consumption management by airlines to reduce fuel consumption per flight.
Yusof stated that due to “limited mitigation measures,” the profit margins of Chinese petrochemical companies will continue to be under pressure.
Like much of China’s excess capacity, a significant portion may cause trouble outside of China. Last month, Kpler forecasted that China’s June finished oil exports would reach a record 2.6 million tons and could displace finished oil from the Middle East and India in certain regions.
For years, Chinese petrochemical plants have been struggling in thin profit margins.
“The ethylene production capacity in China is already in surplus,” said Manish Sejwal, a natural gas liquids analyst at Rystad Energy. “All of this is happening during a period of global economic slowdown, where ethylene demand is very uncertain.”
According to Rystad, China plans to increase its ethylene production capacity by 6 million tons in 2025 and another 20 million tons in the next three years, reaching a staggering total capacity of 70 million tons.