Chinese Refining in May at Lowest Level in Nearly 4 Years

Chinese oil refiners sharply reduced output last month to the weakest level in nearly four years, after the country's crude imports plunged to an eight-year low due to the nearhalt to shipments from the Persian Gulf.

Aluminum, another commodity heavily impacted by the war in Iran, saw production hit a record in May, according to the statistics bureau on Tuesday. Meanwhile, China's worst coal disaster in years forced miners to trim output as the authorities tightened up on safety.

Oil refining volumes extended declines, dropping 9.1 percent year-on-year to 53.72 million tons, the lowest since August 2022. State-owned refiners ended the month with an average run rate of 66.3 percent, a low for a dataset that began in late 2021.

The burning question for the market, now that a deal has been reached to reopen the Strait of Hormuz, is whether Chinese demand for fuels like gasoline and diesel will normalize, or whether the rapid electrification of the country's transport network has permanently dented consumption. GL Consulting is among those that expect refining activity to remain subdued, forecasting a 5 percent drop in 2026.  

The interim agreement between the US and Iran should help relieve severe tightness in the global market for aluminum. China, the world’s largest producer, has taken advantage of the shortfall from the Middle East to maximize output, which rose again in May by 1.7 percent to 3.89 million tons. 

But the end to hostilities could prove an inflection point if Chinese exports contract in coming months as Middle Eastern supply gradually resumes. Domestic demand remains tepid, while the test of the government's capacity ceiling could leave smelters at risk of increased regulatory scrutiny. 

Nationwide coal output was affected by heightened safety inspections, falling 1.7 percent to 397.22 million tons. The disruptions are likely to persist for longer in Shanxi, the top producing province where the deadly accident occurred. Other hubs may be quicker to recover as the government seeks to ensure sufficient power over the peak summer period.

Electricity output rose 4.2 percent in May, with southern regions recording peak loads one month earlier than usual due to El Niño-driven heat.

Steel production fell 2.7 percent to 84.36 million tons as mills continue to adjust to weaker demand stemming from the ongoing property crisis and lackluster economic activity. Lower steel prices and higher coking coal costs because of the Shanxi accident have also compressed margins.