--Clyde Russell is a Reuters market analyst. The viewsexpressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 3 (Reuters) - Chinese refiners,like many before them, have finally realised that parties don'tlast forever and eventually everyone has to sober up.
The decision by state-controlled giant PetroChina to put off two new refineries and delay expansion ofanother is the latest, most dramatic signal that China's refinedfuels capacity has expanded too fast.
While China will no doubt continue to build refineries, thepace is likely to slow over the next few years, and new unitswill have to compete with other projects to secure funding.
This means refining economics will have to improve tojustify the expense of building and operating costly plants.
Refiners are now travelling the same road large, globalminers were forced onto in 2011, when investors caught on to thefact that endlessly adding to the supply of commodities whenChina's appetite was starting to taper wasn't a profitable idea.
Some may argue it took them too long, but eventuallycompanies like BHP Billiton, Rio Tinto andAnglo American publicly announced they were reining inspending, cutting costs and returning more to shareholders.
Those three companies also changed chief executives, dumpingdealmakers for operators as the focus shifted from expansion torunning mines and other assets as efficiently as possible.
While executives at the state-run Chinese refining giantsPetroChina and Sinopec are unlikely to losetheir jobs, they are likely to be reviewing their expansionplans and re-assessing where their priorities lie.
PetroChina's decision to delay by two years the start-up ofits 200,000 barrels-per-day (bpd) Kunming refinery to 2016, andthe four-year delay to the 400,000 bpd joint venture Jieyangrefinery to 2017 may be part of the process.
The company will also delay the expansion of its Huabeirefinery to 2015 from this year.
A joint venture with Royal Dutch Shell and QatarPetroleum to build a 400,000 bpd refinery in Taizhou alsoappears to have stumbled, with the Anglo-Dutch multinationalreported to have pulled out.
BP is dropping plans to invest in a refinery in Chinaas well, concerned about slow fuel demand growth amid a bountyof capacity.
CAPACITY ADDITIONS OUTSTRIP DEMAND
China added about 250,000 bpd of refining capacity in 2013,and two refineries with a combined 440,000 bpd are scheduled tostart up in the first quarter of 2014.
This will take total capacity to about 12.7 million bpd,with a further 3.16 million bpd still planned by 2020.
Yet, China's implied oil demand rose at the slowest rate inmore than two decades in 2013, gaining just 1.6 percent to 9.78million bpd.
This would mean that by the middle of this year there couldbe already close to 3 million bpd of refining capacity not beingused, and it's unlikely that demand will rise fast enough tojustify the planned refineries.
CNPC, the parent of PetroChina, did forecast a rebound inoil demand in 2014, tipping 4 percent growth to about 10.36million bpd, which equates to a gain of 400,000 bpd.
Assuming that 4 percent growth is the new normal for China,this would put oil demand at just above 13.1 million bpd by2020, when refining capacity is slated to be closer to 15.7million bpd.
That 4 percent growth figure for each year of the next sevenmay also be optimistic, given China's economic growth rate isexpected to ease as the country tries to rotate from beingreliant on fixed-asset investment to consumer spending.
It seems inevitable that China will have to further scaleback its refinery expansion plans, unless it's intending tobecome a major player in the global market for refined fuels.
