China’s independent refiners keep buying Iranian crude as margins worsen, pressure builds

China’s independent refiners are still pulling in Iranian crude, but the business is getting harder to justify as domestic margins sink and Washington tightens the screws. The pressure now comes from two directions at once: U.S. sanctions risk and a simple economic squeeze that makes every barrel less profitable inside China.

The U.S. Department of the Treasury sanctioned Hengli Petrochemical (Dalian) Refinery Co., Ltd. on April 24, saying it was one of Iran’s largest customers and had bought billions of dollars’ worth of Iranian petroleum. Treasury also targeted about 40 shipping companies and vessels tied to Iran’s shadow fleet, raising the risk for the middlemen and tankers that keep the trade moving through the Persian Gulf and the Strait of Hormuz. Four days later, Treasury warned financial institutions that China-based independent teapot refineries, especially in Shandong province, pose sanctions risk because of their role in importing and refining Iranian crude.

Beijing’s message has gone the other way. China’s embassy in Washington said normal trade should not be harmed and urged the United States to stop abusing sanctions and politicizing trade. At the same time, Chinese officials told private refiners earlier in April to keep fuel output at 2025 levels even if they lost money, and a separate batch of crude import quotas totaling about 55 million metric tons, or 401.5 million barrels, signaled that independent refiners were still expected to run.

The problem is that the economics are deteriorating fast. Analysts at SCI estimated China’s gross domestic processing margins at minus 530 yuan per metric ton, a one-year low, as regulated fuel prices lagged the sharp rise in crude costs triggered by the war. That gap is what makes sanctions pressure bite differently: if the refining margin is weak enough, even firms willing to take enforcement risk have less incentive to keep buying.

The flow has not stopped. China’s teapot refiners account for roughly 90% of Iran’s oil shipments, and they imported a record 1.8 million barrels per day in March, according to Vortexa Analytics. Vortexa also said Shandong onshore crude inventories rose by more than 20 million barrels in March, the fastest monthly stock build on record, underscoring how quickly Iranian arrivals were filling tanks. Even after a U.S. waiver lapsed, cargoes were still reaching Shandong, where the independent refiners are concentrated.

That leaves Iran dependent on a narrow set of buyers and Chinese refiners caught between profit and policy. As long as Iranian crude remains available and the alternative feedstock is more expensive, the trade can keep going. But with margins at a one-year low, import quotas under political control and sanctions risk climbing, the balance is becoming more fragile.