Markets & Finance

Higher Gas Prices Won't Help China Refiners


Hong Kong and New York-listed Sinopec Shanghai Petrochemical warned late Friday that high crude oil prices and China's low domestic products selling prices would push it, and particularly its refining operations, into the red for the first quarter of 2006. Asia's largest refiner, China's Sinopec Corp, holds a controlling 55.56% in SSPC.

"In light of high crude oil prices and stagnant selling prices for downstream oil products, the company expects to record a net loss for [Q1] as a result of significant losses from the company's refinery businesses," SPCC said. Only two weeks prior, on Mar. 26, SPCC reported a 51% drop in 2005 net income, citing the same reasons.

"The distorted correlation between prices of petroleum products and prices of crude oil has caused heavy losses to [our] oil refining business," SSPC Chairman Rong Guangdao explained in a statement to the Hong Kong Stock Exchange at the time. That day, China's central government raised gasoil and gasoline prices for the first time since July 2005.

Still, the increase would do little to lift the pressure on China's refiners, Rong told reporters Mar. 27. Though Beijing had raised domestic gasoil prices by Yuan 200/mt ($3.34/barrel) and gasoline by Yuan 300/mt effective Mar. 26, the refining sector would need an additional increase in product prices of at least Yuan 500-700/mt before operating margins would become positive, he said.

Based on the NDRC official figures, Chinese oil products prices need to rise by a combined Yuan 1,000/mt before the latest price revision just to break even. Thus, Beijing might need to increase prices a few times before they could reach such a level, Rong said.

SSPC's refining business posted a loss of Yuan 1.5 billion ($187 million) in 2005, chief financial officer Han Zhihao said during the company's 2005 financial results announcement in late March. The company started recording a loss in mid-2005. While its refining business achieved a 7.2% jump in profit margins in 2004, SSPC suffered a 2.4% loss in margins last year.

Han noted, however, that the company received a Yuan 630 million subsidy from the central government to compensate part of the financial loss it incurred in 2005. Last December, Beijing announced a one-off Yuan 10 billion ($1.24 billion) subsidy to state oil group China Petrochemical Corp Group and its 67.92%-owned publicly listed business arm Sinopec Corp.

Meanwhile, SSPC plans to process 9.5 million mt of crude and condensate this year, down from 9.63 million mt in 2005. Production of gasoline and jet fuel is expected to reach 1.48 million mt in 2006, 86,000 mt less than a year earlier, while ethylene output is set to slip to 960,000 mt this year from 962,400 mt in 2005, Han said.

--Mike Kobal, michael_kobal@platts.com


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