Sinopec Says Business Conditions to Stay Challenging

Sinopec Says Business Conditions to Stay Challenging

China Petrochemical Corp., Asia’s largest refiner, expects business conditions to stay challenging next year as crude oil prices rise while fuel demand growth lags behind expansion in processing capacity. The domestic oil-product market will be oversupplied next year when new refining facilities come on-stream and independent plants increase output, said President Su Shulin in an on-line newsletter today.

Oil companies are expanding refining capacity to meet industrial demand spurred by the government’s economic stimulus and to benefit from a fuel-pricing system introduced last year that ensures a profit.

 The world’s fastest-growing major economy processed a record volume of crude in November. “The overcapacity shouldn’t have too big an impact on Sinopec if the pricing mechanism works properly,” Grace Liu, an analyst with Guotai Junan Securities Co., said by telephone from Shenzhen.

 “Business should be better for the company next year as the demand recovery continues.” Under a new mechanism introduced in December last year, the government may adjust prices when crude oil costs change more than 4 percent over 22 consecutive working days.

China last raised gasoline and diesel prices by as much as 8 percent on Nov. 10, the country’s fifth increase this year. Hong Kong-listed unit China Petroleum and Chemical Corp., known as Sinopec, has advanced 45 percent this year compared with the Hang Seng Index’s 50 percent gain. Sinopec climbed 1.3 percent to close at HK$6.8 today, while the benchmark rose 0.88 percent.

Refining Profit The National Development and Reform Commission, the country’s top economic planner, said on May 8 that the government will ensure a “normal profit” for refiners when crude oil trades below $80 a barrel. Refining margins will be reduced if crude is between $80 and $130, the NDRC said then.

Crude oil in New York has risen 74 percent this year and was at $77.28 a barrel in electronic trading at 12:40 p.m. in Singapore. Increases in domestic oil-product prices, controlled by the government, have lagged behind gains in crude, prompting speculation Sinopec’s profit in the fourth quarter will decline from the previous three months.

 Net income in the third quarter was 16.55 billion yuan ($2.4 billion), a 25 percent drop from a record 22.03 billion yuan in the April-to-June quarter. The company, China’s second-biggest oil and gas producer, gets almost all its revenue from refining and the sale and distribution of fuels.

Oil production accounted for just over 2 percent of sales, according to its 2008 annual report. The company imports about 80 percent of the crude it processes. Sales This Year Sinopec’s fuel sales growth may ease this year on a slower economy and increased competition from independent refineries, China Petrochemical said in a statement today.

Rivalry in the domestic ethylene market will intensify in 2010 as new production capacity comes on-stream, Su said. The state-controlled refiner estimates oil-product sales will rise 1.8 percent from a year earlier to 129 million metric tons. In 2008, sales climbed 3 percent to 122.98 million tons, Sinopec said in January. Crude oil processing volume at Sinopec Group will exceed 200 million tons in 2010, Zhang Jianhua, vice president of the listed unit, said in another statement.

The unit’s oil processing rose 4.5 percent to 168.8 million tons in 2008. China may use 8.3 million barrels of oil a day this year, 9.8 percent of world consumption and 46 percent of Asia’s, according to data from the International Energy Agency. Market Share China Petrochemical has met its operation targets for this year, said Su, who is also the chairman of Sinopec.

 The group plans to boost its share of the fuel-oil and kerosene market and step up domestic refining ventures, according to Su in a separate statement. Beijing-based Sinopec may increase refining capacity by between 12 and 15 million tons annually in the next few years, President Wang Tianpu said on Nov. 3.

That’s a capacity gain of as much as 300,000 barrels a day. Sinopec may build a 240,000 barrel-a-day refinery in Shanghai to meet rising fuel demand on the eastern coast, an official from the Gaoqiao refinery in the city said on Dec. 9, declining to be named because of company rules. The nation’s commercial center currently has two refineries, both of which are owned by Sinopec.

The company also plans to boost the capacity of its Maoming refinery in southern China by 33 percent. China may increase its refining capacity by 2.9 million barrels a day between 2008 and 2014, the Paris-based International Energy Agency said in a report on Dec. 11.  

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