Navigating the Refining Rebound: Strategic Opportunities in China's Energy Infrastructure and Petrochemicals

The refining sector in China faces a pivotal juncture as May 2025 data underscores a 9-month low in refinery throughput, driven by peak maintenance activity and strategic stockpiling of crude. This downturn, however, masks a compelling opportunity for investors: a near-term tactical overweight in select refining stocks poised to benefit from post-maintenance demand recovery, alongside long-term value in firms leveraging petrochemical integration and efficiency gains. Let's dissect the catalysts and contours of this evolving landscape.

The Maintenance Overhang: A Catalyst for Sector Consolidation

China's refinery throughput in April 2025 dropped to 14.18 million barrels per day (b/d), a 4.9% decline from March's 18-month high. By May, offline capacity surged to a record 2.0 million b/d—the highest since June 2021—due to scheduled maintenance at major state-owned refineries like Sinopec's Jiujiang and PetroChina's Jinxi facilities. This shutdown period, extending into early summer, has created a crude surplus of 1.89 million b/d, the largest since mid-2023, as imports of discounted Iranian and Russian crude outpaced processing capacity.

The surplus, however, is a double-edged sword. While it pressures near-term refining margins, it also accelerates a much-needed reckoning. Smaller, less efficient refineries—particularly in Shandong province—are struggling to justify continued operations amid sanctions risks and thin margins. This creates an opening for consolidation, favoring integrated majors like Sinopec (SHI) and PetroChina (PTR), which can leverage scale and petrochemical synergies to weather the storm.

Tactical Overweight: Betting on the Demand Rebound

The maintenance-driven slump is temporary. Analysts project that offline capacity will peak in May before easing to 1.2 million b/d by July, allowing throughput to rebound toward 14.5 million b/d by Q3 2025. This recovery, coupled with summer demand for transportation fuels, positions refining stocks for a near-term upside. Key considerations:

1. Inventory Drawdowns: Record crude inventories (1.17 billion barrels as of May 19) will eventually be processed as maintenance winds down, creating a “sweet spot” for refiners with access to discounted crude and efficient operations.
2. Crack Spread Recovery: The refining margin (crack spread) has been depressed by oversupply but should rebound as throughput normalizes. Firms like CNOOC (CEO), which operate high-utilization facilities and benefit from integrated oilfield-to-petrochemicals value chains, are well-positioned here.
3. Geopolitical Arbitrage: Select refiners are purchasing Iranian and Russian crude at steep discounts while navigating sanctions risks. Those with robust compliance frameworks and storage capacity—such as Yanshan Petrochemical (subsidiary of Sinopec)—could gain pricing power as crude differentials widen.

Long-Term Value: Petrochemicals and Efficiency as Anchors

Beyond the cyclical rebound, the refining sector's future hinges on two structural advantages:
- Downstream Petrochemical Integration: Refiners with strong petrochemical portfolios (e.g., Sinopec's Yanshan facility) can shift feedstock to high-margin plastics and polymers, reducing reliance on volatile fuel markets. China's petrochemical demand is projected to grow at 4% annually through 2030, driven by manufacturing and infrastructure.
- Operational Efficiency: Companies like Zhenhai Refining & Chemical (subsidiary of Zhejiang Petrochemical) are investing in digital tools and AI to optimize maintenance cycles and energy use. These firms can sustain margins even during downturns, as their variable costs are 15–20% lower than industry averages.

Risks and Considerations

• Geopolitical Volatility: U.S.-China trade tensions and sanctions on Iranian/Russian crude could disrupt supply chains and refining margins.
• Energy Transition Pressures: Electric vehicle adoption in China (NEVs now account for nearly 50% of new car sales) is eroding gasoline demand. Refiners must pivot to petrochemicals or risk stranded assets.
• Overcapacity Risks: New projects like Yulong Petrochemical's 40-million-ton refinery (due online in 2026) may exacerbate oversupply unless absorbed by rising petrochemical demand.

Investment Thesis: Buy the Dip, Play the Transition

Near-Term (3–6 months): Overweight in Sinopec (SHI) and CNOOC (CEO), which combine scale, petrochemical integration, and exposure to post-maintenance demand recovery. Their valuations (P/E ~5–7x) are undemanding relative to historical averages.

Long-Term (1–3 years): Favor firms with petrochemical moats and efficiency advantages, such as Zhejiang Petrochemical (subsidiary of Zhenhua). These companies are best placed to capitalize on China's shift toward value-added chemicals and green energy infrastructure.

Conclusion: The Refining Sector's Phoenix Moment

The May 2025 throughput decline is not an end but a beginning—a forced shakeout that rewards the resilient. Investors who pair near-term tactical bets on maintenance-driven recovery with long-term exposure to petrochemical integration stand to benefit as China's refining sector evolves from a commodity processor to a high-margin chemical powerhouse. The road ahead is bumpy, but the refining rebound is a journey worth taking.

Data sources: National Bureau of Statistics of China, Platts Analytics, Kpler Refinery Monthly, International Energy Agency (IEA).