Sinopec refinery gets boost from fuel price reform

Sinopec Shanghai Petrochemical, the operator of China Petroleum & Chemical's second-largest oil refinery, has posted a profit for the first half of the year, thanks to lower costs after a facility upgrade and Beijing's fuel pricing policy reform.

The company saved close to 400 million yuan (HK$500 million) of crude oil costs in the half because of more efficient material utilisation after a 6.3 billion yuan upgrade of its production facilities, chairman Wang Zhiqing said.

"The overhaul allowed us to refine crude oil with a wider variety of quality," he said. "Every US dollar of crude oil cost cut translates into some 700 million of savings for us annually."

He said the facility revamp helped cut overall crude consumption costs by just over US$1 a barrel compared with its rivals with less modern facilities, since it could produce the same fuel and chemical products by using cheaper, lower-quality crude.

Sinopec Shanghai said this month that its net profit would amount to 438 million yuan for the first half of the year, a turnaround from a loss of 1.19 billion yuan in the same period last year.

Part of this is attributed to Beijing's fuel price mechanism reform in March, which aims to link domestic prices to international price levels.

But Wang said the reform is only one step towards Beijing's long-term goal of making domestic prices fully market-based. The mainland now caps fuel prices to protect the poor.

Wang quoted the National Development and Reform Commission, which said that current domestic fuel prices translate into crude costs of some US$7 to US$8 a barrel lower than international crude prices of around US$105. That means Sinopec Petrochemical could have additional revenues of some five billion yuan if domestic fuel prices matched international levels.

The company posted major losses in 2008 and 2012. It saw a record profit of 3.97 billion yuan in 2004, when sales volume was 30 per cent less than last year's.

Asked if he believes Beijing will soon fully link domestic and fuel prices to international levels given the NDRC has indicated it would do so for natural gas prices by 2015, Wang said price liberalisation was an inevitable process, since fuel was priced too cheaply in the past. It was an unsustainable policy given worsening traffic congestion and air pollution in major cities, he said.

Wang said that while Sinopec Shanghai's chemical manufacturing has returned to a slight profit since May, the outlook was still uncertain, as there was no clear sign of a reversal in the economic slowdown.

The company will focus on expanding the output of downstream higher-value-added products, as its basic products are facing stiff competition from US and Middle Eastern producers.