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Driving Forces Behind the Transformation of China Refined Oil Market: Marketization, Eco-friendliness, Digitization and Urbanization

2018 is a rapidly changing year for refined oil market. The industry sees frequently-released policies and volatile price trend. The market participants feel at sea when the “black swan” and “gray rhino” events happen one after another. The opaquer the market is, the more urgent to find the behind drivers.

According to GL INFO’s observation on relevant policies and the cluster analysis of industry trends, the future development of China oil product market is summarized into four major directions marketization, eco-friendliness, digitization and urbanization. These four trends will coexist and intersect to influence China oil product market policy, market structure, consumption structure and profit model.
The biggest driving force behind the marketization is the overcapacity. Under the premise of guaranteeing energy supply security, oil product marketization would be further advanced to pave the way for the debut of oil product futures, and to unleash the domestic demand for crude oil futures. However, marketization doesn’t mean unrestraint; on the contrary, compliance costs and standardization requirements will become higher. This is a challenge for corporates’ operation management and risk control. Tracing back to the marketization process of developed countries, the biggest challenge for private business is the de-channelization and value maximization of the business ecosystem.

Considering the coming-up new capacity and the elimination of outdated one, GL information (GL INFO) estimates that China total refining capacity would hit a new high in 2024 at 1 billion/year and then inch down. The gasoline demand would reach its peak in 2028, while the diesel demand already climbed to the top in 2016. The continuous increase in refining capacity during China’s 13th and 14th five-year plan periods and the slowdown in demand growth of gasoline and diesel exacerbates the supply surplus in China oil product market and rising export volumes.

Eco-friendliness has been defined as a new basic state policy, which will profoundly change China’s industrial consumption structure and cost structure. Although the future is uncertain, the Chinese government's determination on eco-friendliness is certain under the circumstance of severe warnings from natural resources such as water, soil and air. Furthermore, in terms of environmental protection requirements, China is likely to apply and implement requirements and standards which are higher than those of the world. For example, China’s coastal ports will implement a higher marine fuel oil standard than IMO2020, with the sulphur content below 0.1% in 2020 (for details, please see the Implementation Plan of Marine Emission Control Areas in the Pearl River Delta, Yangtze River Delta and the Bohai Rim (Beijing-Tianjin-Hebei) issued by Ministry of Transport in December 2015). Therefore, in addition to the product upgrade cost, the operation cost of enterprises in the environmental protection would also significantly increase, such as: inspection fee, licensing fee, transportation fee, vehicle modification charge, etc..

China is the world’s largest country popularized with internet applications. Digitization has already accelerated to infiltrate into traditional energy industry, making China’s crude oil market differs when it catches up the developed countries. A more centralized demand for gasoline and diesel is boosted by the development of ridesharing and data platforms such as sharing bicycles and cars, Didi Taxi and other applications of relevant big data. Thus, the traditional energy industry begins to explore new profit increasing point in the new economy, including winning in the last mile, or forming quantitative retailing sales strategy with the help of AI deep learning. Some state-owned enterprises have quietly established the IOT big data platform for their supply chain management.
Urbanization will drive a sustainable development of China economy and oil products demand. Furthermore, it will also result in the cascade development of China gas stations. More developed regions are seeking innovations in profit model and breakthroughs in efficiency after the demand peaked. Newly and originally acknowledged first-tier cities, as the mainstay of demand, also provide more room for innovation when they expand. We can see new driving factors behind the changing tendency of interprovincial consumption of gasoline and diesel, along with the rise of second and third-tier cities as the emerging forces.

Consumption sector is the “alluvial plain”, where is intersection of four streams - marketization, eco-friendliness, digitization and urbanization, becomes a “staging post” that draws the most attention.

The focus of China oil product market analysis also has been shifted from supply side to consumption side. The demand analysis, such as market opportunity, market size, affordability, consumption habits and consumption trend, will the core of business planning and competitive positioning. Furthermore, except for traditional consumption pattern, technological innovation and breakthrough also brings profound influence on consumption tendency.