China's MESC Imports Tumble 96%; Refining Sector Faces Massive Shakeout
In May 2025, Reuters reported that a Middle Eastern country was preparing to sign a landmark agreement with the United States - committing to a permanent halt to nuclear weapons development in exchange for a full lifting of sanctions. Since early 2025, the U.S. has reinstated its "maximum pressure" policy, expanding its sanctions regime from crude oil tankers to a dual-track model targeting both corporate entities and maritime logistics.
One Independent Refinery Sanctioned Per Month
Beginning in March 2025, the U.S. has been adding one Chinese independent refinery per month to its Specially Designated Nationals (SDN) list. Sanctioned firms, such as Shandong Shouguang Luqing Petrochemical and Shandong Shengxing Chemical, face asset freezes and are barred from conducting U.S. dollar-denominated transactions.
MESC Imports into China Collapse
Imports of Middle Eastern Special Crude (MESC) through China's Shandong ports are projected to drop 96% year-on-year in May, according to shipping data as of mid-May. The share of MESC directed to China of its total exports has fallen sharply from 77% in the full year of 2024 to an estimated 33% in May 2025. Meanwhile, the proportion of MESC shipments with unidentified destinations has surged from 19% in 2024 to 69% - pointing to increased use of ship-to-ship transfers and transshipment strategies aimed at masking origin and bypassing sanctions.
Tax Policy Headwinds Compound Supply Pressures
Insufficient crude import quotas have pushed some independent refiners to rely on imported fuel oil - some linked to MESC - as an alternative feedstock. However, these refineries now face mounting pressure on margins and operations (see chart below).
In January 2025, China raised the import tariff on fuel oil from 1% to 3%, while lowering consumption tax deduction ratios. As a result, imports of fuel oil and bitumen mixture fell 35% and 27% YoY, respectively, in Q1 2025. These feedstocks are expected to comprise just 5–6% of independent refiners' feed mix for the full year.
Estimates of Shandong Independents' Refining Margins and Increased Costs
Refining Capacity Rationalization Accelerates
With upstream MESC supply curtailed and downstream demand remaining subdued, GL Consulting forecasts that 60-80 million tonnes per annum (Mtpa) of refining capacity - primarily from smaller and medium-sized independents - could be phased out over the next 3-5 years. This structural shift could accelerate consolidation within China's refining industry.
Sanctions Relief Deal Could Reframe Market Dynamics
The U.S. is reportedly in talks to finalize a sanctions relief agreement with a Middle Eastern country. If implemented, the deal could begin to reshape trade flows as early as Q3–Q4 2025. While this could ease crude supply constraints for Chinese refiners, it may also lead to higher procurement costs and contribute to global oversupply risks.
For detailed implications and market analysis, refer to GL Consulting's China Policy Perspective – May 2025 Edition.
Full Text Highlights:
- Sanctions Trajectory – Evolution of U.S. sanctions on Middle Eastern, Russian, and Venezuelan crude in 2025
- Import Trends – Changes in China's procurement volumes, with a focus on Shandong-based independents
- Corporate Impact Assessment – Profiles of the most exposed company types and the rising costs
- Strategic Adaptation – How Chinese independent refiners are adapting their trading and sourcing strategies
- Five-Year Outlook – Forecast of China's crude oil demand and refining structure through 2030
- Sanctions Relief Scenarios – Impact of a potential U.S.-Middle East agreement on China's crude import strategy
The above content is the major conclusions and highlights extracted from China (Energy Transition) Policy Perspective. To get detailed full text, send an email to glconsulting@mysteel.com.
