Impact from three major factors intensifies profit pressure on domestic refineries

Thread Content

Due to the relentless rise in oil prices, the positive move by the National Development and Reform Commission to raise the retail reference prices for refined oil products has failed to reverse the heavy losses suffered by Sinopec, Asia’s largest refiner. Additionally, the possible abolition of the VAT refund policy for oil imports, along with rising costs associated with building new refining facilities, will put further pressure on Chinese refineries to incur losses. 　　Last week, international oil prices exceeded the $145 mark, and the industry believes it is only a matter of time before prices reach $150. Many analysts believe that the decline in Sinopec’s stock price reflects market concerns that the surge in global oil prices has not yet ended, and with domestic oil prices still under control, this is undoubtedly a negative factor. On the other hand, news recently leaked in the industry regarding the possible cancellation of value-added tax rebates for imported refined oil and crude oil also has an impact on Chinese refiners. 　　“After the oil price adjustment, although the extent of losses has decreased, the refining sector is still a long way away from turning a profit. If financial subsidies are removed again, refineries will inevitably face even greater pressure. ”A senior executive at Sinopec said helplessly in an interview with our newspaper’s reporter. 　　Frank Li, an analyst at JPMorgan Chase, also said that if oil prices average $120 per barrel, Sinopec’s refining business would incur quarterly operating losses of up to 31 billion yuan (approximately $4.5 billion). “In contrast, Sinopec’s combined quarterly profit from its exploration, production, marketing, and chemical business amounts to only about 24 billion yuan. ”He believes that without additional financial support or further increases in the retail prices of refined oil, such losses will continue. On the other hand, Sinopec was forced to import 1.5 million tons of diesel in the second quarter, resulting in a loss of around 3.1 billion yuan, which increased the company’s financial burden. 　　It is reported that JPMorgan Chase has reduced its forecast for Sinopec’s net profit in 2008 by 67% to 18.9 billion yuan. This forecast is based on an oil price of $110 per barrel for the remaining two quarters of this year, but it does not take into account the decline in the company’s revenue from chemical sales. To increase diesel production, Sinopec has reduced the production of naphtha and petrochemical products in June and July. 　　According to estimates by Grunauer, an analyst at Nomura Securities, Sinopec’s cash flow this year was negative at RMB 21.5 billion, whereas in 2007 the company had a cash flow of RMB 20.1 billion. Grunauer also said that if oil prices did not rise any further, Sinopec’s negative cash flow situation would persist until 2010, while capital expenditures during that period would increase from RMB 121.8 billion to RMB 168.1 billion. 　　Unfortunately, Chinese refiners will also have to deal with rising costs for domestic project construction. The International Energy Agency noted last week that, as in other sectors, construction timelines may be delayed if financing becomes an issue, due to the strained financial conditions of state-owned refiners.