China Cracks Down on Teapot Refineries

A crackdown by regulators in China has forced the closing - at least temporarily - of a number of base oil plants. Most are small and low-tech, but observers say their collective volumes are significant and that the shutdowns have affected local prices.

The regulator actions against base oil plants are part of a broader campaign targeting a wide range of industries and intended to address air pollution and other environmental problems in China. Considered among the countrys strictest environmental initiative to date, it was launched in January of 2015 and led the Ministry of Environmental Protection - beginning in April of this year - to send inspection teams to factories and refineries around the country to check compliance with pollution control standards.

Photo: Imagine China/Newscom

A regulatory crackdown in China has forced the closure of numerous base oil sources, mostly small, independent oil processors.

The Ministry of Finance recently issued a notice that it would crack down on enterprises located outside of planned industrial areas - particularly small workshops located within residential areas - as well as any facilities that have not been approved by authorities. Approved facilities that are unable to properly handle pollutants are also be subject to enforcement.

Observers say these campaigns have caught up a large number of facilities engaged in various types of petroleum processing, some of them conventional oil refineries but also larger numbers of teapot refineries - generally small and sometimes illicit businesses that often use techniques other than modern refining processes to make oil products.

According to consulting firm Zhuochuang, a significant number of the small facilities that have closed make base oils, often through using processes such as acid pickling and furfural refining.

Some of the products from these non-standard base oil workshops can meet national standards, but [the workshops] dont have a complete set of technologies, Zhuochuang analyst Gong Wei said. Most of their products will be used to blend farm machinery oils and some industrial oils, in a backward way, of course.

Teapot refineries may be small, but they have played a significant role in the market because there are so many of them. According to LubesnGreases Global Guide to Base Oil Refining, China has 24 plants that make virgin mineral base oils using solvent refining, hydrocracking and/or hydrotreatment. Zhuochuang says the number swells to more than 100 when teapots are included. The firm added that many of those base oil plants are located in Shandong and Hebei provinces and have capacity to make just several thousand tons of base stocks per year.

Zhuochuang and others told Lube Report Asia that the governments crackdown has also sidelined some more conventional base oil plants, and that the overall constriction in supply has been enough to affect prices. Another consultancy, Jinlianchuang, said prices in China for Group I 150 and 250 solvent neutral grades rose between 300 and 400 (U.S. $45.4 and $60.5) per metric ton in August, and that plant closings were to blame. Zhuochuang said base oils in general underwent hikes ranging from 200 to 500 in August. Observers said prices did fall back a bit this month because of an increase in imports and a layoff in buying ahead of the Golden Week holiday approaching in October.

The consulting firms said the outlook for the future is uncertain. Some closed plants are working to make internal improvements, but others have closed for good. Some observers have said this could be the start of a significant reduction in the number of teapot refineries.

Prospects for prices are tricky to discern because its not known how long it will take operators that do want to stay in business to reopen. At the same time, Gong said regulators have also closed numerous finished lubricant blending plants, and that this has reduced base oil demand, easing the upward pressure on prices.

Many people only see the impact of environmental and safety law enforcement on refineries, but downstream blenders are also being affected. That is why we are seeing a slowdown of base oil price increase, he said. Also this peak season is usually supported by demand from price-sensitive blenders. The current high level of base oil price is also preventing them from placing more orders.