Update on China's Petroleum and Petrochemical Industry
Content provided
by:
Business Intelligence - China
No. 8
Executive Summary
2000 was a spectacular year for China's petroleum and
petrochemical industry with a two-digit sales growth and a three-digit
profit growth, driven by accelerated demand recovery, both domestic
and external, and a surge in crude oil price.
The industry performance weakened but remained strong
in H1 2001, in tandem with continued strength in domestic demand while
softened external demand and prices for petrochemical products.
There have been mixed developments in H2
2001. On negative side, there have been a sharp decline in crude oil
price, accelerated weakening of external demand for petrochemical
products, further fall in petrochemical prices, and newly emerged
weakness in refined product prices. On positive side, a new pricing
system for refined products, coordinated market-liberalization efforts
by CNPC and Sinopec, and a market-rectification drive by the government,
have been initiated.
Overall, the negative developments outweighed
the positive moves in H2 2001. As a result, the industry performed
much more poorly in H2 2001 than in H1 2001, and in turn in 2001 than
in 2000 with a marginally positive sales growth while a negative profit
growth.
Looking to 2002, continued strong domestic
economy, stronger emergence of the effects of the positive moves initiated
in H2 2001, largely expanded retail network, improved production facilities
and accelerating reforms and rationalization drive as well as positive
WTO impacts, are expected to sustain the industry's business volume
at a high level. But downside risk for crude oil price, continued
global economic weakness and negative WTO impacts will continue to
hurt sales value and petrochemical and refining margin as well as
external demand.
The extent of the decline in crude oil
price and the severity and duration of global economic weakness are
two uncertainties, while they are of critical importance for the industry's
performance in 2002.
Assuming that the average Brent crude oil price will
be USD21/barrel and that global economy will begin to recover in H2
2002, total sales of China's petroleum and petrochemical industry
are expected to decline moderately, while with a larger decline in
profit, in 2002.
1.
Review of 2000 and 2001
1.1
2000 - A spectacular year for China's petroleum
and petrochemical industry
China's petroleum and petrochemical industry achieved
spectacular results in 2000, with total sales and net profit growing
by 13.2% and 204% respectively.
This is first due to strengthened demand arising from
the country's economic recovery as well as the recovery of Asian and
global economies. China's economy grew by 8% in 2000 as compared to
7.1% in 1999, while Asian economies that are the major destinations
of China's exports of the industry as well as the industry's downstream
products, showed continued rebound from the Asian financial crisis.
It is secondly attributed to a surge in
crude oil price, with the average Brent oil price rising from USD17.5/barrel
in 1999 to USD28.7/barrel in 2000, and also a sharp rise in the prices
of refined products since mid-2000 when the prices began to be linked
to the prices in international markets (Singapore market).
Driven by both domestic and external demand, domestic
production rose strongly, with output of most refined and petrochemical
products growing by over 15% while crude oil increasing 2%.
Sales grew more rapidly with both the volume and price
effects.
The robust demand also resulted in a 56% increase in
total imports of oil and petrochemical products and a 91.9% increase
in crude oil import.
Meanwhile the price effects as well as the reform and
rationalization efforts by industry players greatly improved profit
margin, resulting in the even higher profit growth.
The Big Three companies of the industry
--- CNPC (China National Petroleum Corporation), Sinopec (China Petrochemical
Corporation) and CNOOC (China National Offshore Oil Corporation) performed
even better.
Two important events for the industry in 2000 are:
1) Sinopec and CNPC underwent an assets-swap restructuring with the
government's debt/equity conversion program, and 2) the two companies
successfully launched IPOs of Sinopec Corp. and PetroChina in HK,
NY and London respectively. These two events have significantly improved
the debt & liability positions of the two industry monopolies
in China.
Meanwhile reforms were accelerated in the industry
with 248 thousand workers being laid off and many small and inefficient
plants being closed. Progress was also made in expanding retail network
(gas stations increased by 9001 and 4530 for Sinopec and CNPC in respectively),
integrating refineries, petrochemical plants with sales & marketing
companies, upgrading equipment, and strengthening international co-operations.
1.2
Weakened but still strong performance in H1 2001
H1 2001 witnessed weakened but overall still strong
growth for the industry, in tandem with continued strength in domestic
demand while weakened prices and external demand for petrochemical
products.
Total sales of the industry grew by 11.6% in H1 2001,
a slowed but still impressive growth. The slowdown is mainly seen
in the petrochemical sector, which is in turn ascribed to worsened
external environment with global economic slowdown. Both export demand
and the demand from export-oriented companies for petrochemical products
largely softened due to the global slowdown, and more importantly
the prices of these products declined rapidly as a result of the importation
of the price weakness in international markets.
But continued robust domestic demand, and continued
high levels of crude oil price and refined product prices, have helped
sustain the sales performance of crude oil and refined products.
Such a mixed performance is clearly reflected in the
interim results on operating profit of Sinopec Corp. and PetroChina.
As both the conglomerates are integrated oil petroleum
and petrochemical companies, their overall sales and profit performance
remained strong. CNOOC Limited's net profit however fell 4.2%, while
this is attributed to an increase in profit tax rate when the preferential
tax treatment period expired in H1 2001.
But different performance is shown for the companies
with different orientation. 3 listed petrochemical companies - Shanghai
Petrochem., Yizhen Chemicals & Fibres and Beijing Yanshang Petrochem.,
all reported a disappointing negative profit growth, while the Zhenhai
Refining and Chem - a major refiner in China, posted a over 90% profit
growth.
1.3
Mixed developments in H2 2001
a)
On negative side
A sharp decline in crude oil price: Crude oil
price began to decline in mid-2001, and the decline has accelerated
since the Sep. 11 tragedy. As a result, the average Brent crude oil
price fell from USD28/barrel in June 2001 to USD20/barrel as at 28
Dec. 2001. This has seriously hurt the profit as well as sales performance
of the oil and petrochemical companies in China, as these companies'
profits are highly sensitive to crude oil prices due to the high contributions
of the E & P (exploration & production) sector to the profits,
as shown in the estimates by selected securities houses.
Accelerated weakening of external demand for petrochemical
and refined products : Global economic slowdown accelerated in
H2 2001, especially since the Sep. 11 tragedy, leading many economies,
including most of the major economies in Asia, to recession or the
brink of recession. As a result, the weakening of the export demand
and the demand from export-oriented companies for China's petrochemical
and refined products have accelerated in H2 2001.
Further decline in petrochemical prices and newly
emerged weakness in refined product prices : Also attributed to
the global economic deterioration, petrochemical prices have declined
to new levels in H2, while the prices of refined products began to
show weakness in mid-2001 and have fallen sharply since then. Such
a price weakening has more than offset the positive effects of the
crude oil price decline on profit margin for refineries and petrochemical
companies, resulting in a shrinking of the overall profit margin for
the industry in H2 2001.
b)
On positive side
New pricing system for refined products : The
State Development Planning Commission (SDPC), China, announced on
17 October 2001 a new pricing system for gasoline and diesel. This
is an important move to sustaining the prices of refined products,
as it allows the refined product prices more responsive to domestic
markets where demand are strong, and when responding to international
markets also linked to other 2 international markets in stead of only
the Singapore market where the refining margin is the lowest. It should
also help contain the irregular inventory hoarding or vacating activities
due to the over-transparency of the old system. Thus the new system
is expected to greatly benefit China's refineries and oil companies
with a wider refining margin and more stable as well as higher oil
production.
Coordinated market-stabilizing efforts by the two
monopolies : Sinopec and CNPC launched in mid-2001 coordinated
efforts to stabilize the markets and prices for refined products and
crude oil. This represents an encouraging progress in establishing
healthy competition in China's petroleum and petrochemical markets
as the vicious competition in the markets, particularly between the
two monopolies, has been the main source of fierce pricing war in
past years. The efforts have already taken effects.
The government's market-rectification drive : The
government has also taken action to rectify markets by promulgating
in October 2001 "The Note on Further Rectification and Normalization
of Market Order for Refined Product Market". It stipulates that
only Sinopec and CNPC can build new gas stations and wholesale refined
products. This should help further contain the undue competition and
stabilize the markets and prices of refined products.
c)
Overall impact
As the first and third positive moves just discussed
were initiated in Q4 2001 while the negative developments prevailed
over the whole H2 2001, the negative factors should have outweighed
the positive ones in H2 2001.
Hence the industry performed much more poorly in H2
2001 than in H1 2001.
1.4
Industry performance for 2001 as a whole - Marginally
positive sales growth while negative profit growth
In light of the above, total sales of the industry
are expected to grow by 3% in 2001.
But profit growth is expected to be negative, at about
-15%, on the back of the extraordinary 204% growth in 2000.
The much poorer profit growth than the sales growth,
in addition to the shrinking of profit margin caused by the decline
in product prices, is also attributed to a large increase in redundancy
compensation expenditure for laid off workers. For Sinopec, this expenditure
cost RMB7.4 bn for those 214 thousands laid off in 2001, which represents
about 60% of the company's total net profit.
2.
Outlook for 2002
2.1
Positives
Continued strong domestic economy : China's
economy will remain strong in 2002, driven by continued robust domestic
consumption and investment, albeit with a slightly slowed growth given
expected weaker export performance due to the weakness of global economy.
GDP is expected to grow by 7.1% in 2002 as compared to the estimated
7.3% for 2001. This will continue to provide a favorable, while underlying,
demand scenario for petroleum and petrochemical products and in turn
for the petroleum and petrochemical industry in 2002.
Positive moves initiated in H2 2001 taking full
effects : The new pricing system for refined products, coordinated
market-stabilizing efforts by Sinopec and CNPC and the government's
market-rectification drive that started in H2 2001 are expected to
take full effects in 2002.
Largely expanded retail network for refined products
: With aggressive efforts to fight for retail market share for
refined products by Sinopec and CNPC in expectation of WTO entry,
the retail network for refined products have expanded rapidly in past
three years, with the number of gas stations increasing 253% to 28200
for Sinopec and 280% to 11859 for CNPC. This is expected to greatly
help the sales of refined products.
Improved production facilities : Sinopec and
CNPC as well as CNOOC have also aggressively invested to upgrade and
increase production facilities in past years, and the effects of these
investments will emerge more strongly in 2002 with many investment
projects coming into operation (refer to Appendix for investment projects
information).
Accelerating reforms and rationalization drive :
SOE reform is set to accelerate for the industry in face of WTO entry.
Having core assets listed on overseas stock markets, all the Big Three
are expected to tackle corporate governance issue more seriously,
which is the key weakness of China's SOEs. Meanwhile their rationalization
efforts, particularly the cost-cutting drive, are set to intensify.
Positive WTO impacts
For the overall package of China's WTO concessions on petroleum and
petrochemical industry, please refer to "The Impact of WTO Entry
on China's Petroleum and Petrochemical Industry", No. 5 Issue,
Business Intelligence - China. The following is the concessions that
will apply in the year of 2002.
These concessions will have both positive and negative
impacts on the industry
(Also refer to the above mentioned report for detailed analysis).
While the biggest long-term positive impact of WTO entry will be to
force Chinese oil and petrochemical companies to go for a more radical
reform and to be further integrated into the global oil and petrochemical
industry both institutionally and technology wise, as far as 2002
is concerned, the positive impacts would be the emergence of the effects
of lower production costs with reduced tariffs on materials, more
foreign investment and then advanced technologies into the industry,
enhanced export outlook for oil and petrochemical products, and also
improved outlook of the demand from improved export prospects of the
industry's downstream products particularly the textile and garment
products.
2.2
Negatives
Downside risk for crude oil price : While the
outlook of crude oil price depends on various economic and political
factors and hence is uncertain, downside risk is high and the decline
in the price started since mid-2001 is likely to continue in 2002.
Taking into account of the forecasts by several selected brokerage
houses in Hong Kong, the average Brent crude oil price is expected
to fall to USD21/barrel in 2002 from 2001's USD24/barrel. As analyzed
earlier, this will greatly affect the sales and profit growth of China's
petroleum and petrochemical companies.
Continued global economic weakness : Global
economic outlook has become even bleaker since the Sep. 11 tragedy.
What many economies are facing in the coming months is not an economic
slowdown but an economic recession. Hence an even weaker global economy
is anticipated at least for H1 2002. We take the market consensus
view that global economy will begin to recover sometime in H2 2002.
But for 2002 as a whole there is no doubt that global economic performance
will continue to be weak. As discussed earlier, such global economic
weakness will continue to hurt the industry on both demand and price
fronts.
Negative WTO impacts : Negative WTO impacts
for 2002 will mainly come from increased imports of gasoline, diesel,
ethylene and polyethylene, given the WTO concessions for the year
listed above. More refining and petrochemical JVs are also likely
to emerge, and some foreign investors would begin to enter distribution
markets for petrochemical and refined products. But these are not
anticipated to have immediate effects on domestic players, and hence
are not major threats in 2002.
2.3
Two uncertainties
WTO concessions are quite clearly set out and it is
believed that they will be implemented as promised, while overall
the negative impacts are not likely to be significant in short term.
But the extent of the decline in crude oil price and
the severity and duration of global economic weakness represent uncertainties
and threats, which are the two key risks to China's petroleum and
petrochemical industry in 2002.
2.4
Two assumptions and forecasts
To conduct forecasts, let us take market consensus
views and make two assumptions that the average Brent crude oil price
will be around USD21/barrel for 2002 and global economy will begin
to recover in H2 2002 and will have a better than 0% growth performance
for 2002 as a whole.
Then total sales and net profit of China's petroleum
and petrochemical industry are expected to fall by 5% and 12% in 2002
respectively.
This memorandum is issued by Standard Chartered Bank and is based
on or derived from information generally available to the public
from sources believed to be reliable. No representation or warranty
is made or implied that it is accurate or complete. Opinions expressed
herein are subject to change without notice. This memorandum has
been prepared solely for information purposes and for circulation
and no responsibility is accepted for use of or reliance on information
provided herein. This memorandum does not constitute any solicitation
to buy or sell any instrument or to engage in any trading strategy.
Standard Chartered Bank, or any company within the group of which
it forms part, may have a position in any of the instruments or
currencies mentioned.
Any queries, please contact: Qun Liao, Standard Chartered Bank,
Hong Kong
Tel No.: (852) 2820-3248, Fax : (852) 2524-3244, E-mail : Qun.Liao@hk.standardchartered.com
