31 August 1998 00:00 [Source: ICB Americas]Jilin Chemical Industrial Company Ltd.'s (JCIC) first half earnings declined 61 percent to RMB 4.765 billion ($576 million), reflecting the downturn in the petrochemical cycle and the Asian economic crisis.
Jiao Haikun, chairman of the board of directors of Jilin Chemical, says the decline in profits was primarily due to decreases in the prices of the group's products and increases in depreciation expenses from the commencement of commercial production at the company's new facilities during the first half.
The company processed an additional 180,000 metric tons of crude oil relative to last year, which caused an increase of RMB 206 million in its expenses for crude oil.
The weighted average price of the company's crude oil in the first half decreased by 2.1 percent to RMB 1,113 per metric ton because of reforms in the pricing mechanism for crude oil and petroleum products introduced by the PRC government, which effective June 1998, began adjusting state oil prices on a monthly basis to reflect international oil prices.
Prior to this policy, Lu Qirong, executive director of JCIC, noted that the company's competitiveness was suffering because of inflated domestic oil prices (CMR 6/8/98 pg. 32).
The company blames weak demand caused by the Asian economic crisis as one of the reasons for low profits and pricing in the first half, along with the devaluation of currencies in China's neighboring countries and the stability of the RMB, which brought more pressure from imports.
Investors have been fearing a devaluation of the RMB despite government promises to the contrary. JCIC has about $400 million in foreign currency denominated debt (most in US dollars) and is in the planning stages of restructuring its debt to reduce foreign currency exposure. A devaluation would raise the company's exports but also increase its losses. Exports account for only 3 percent of JCIC's revenue.
Price decreases hurt the group's operating results. Its petroleum products suffered a 20 percent decline in pricing despite a 13 percent gain in sales volume. Petrochemical and organic chemical products were the least affected and faced only a 5 percent drop in prices.
Prices for dyestuffs and dye intermediates dipped 10 percent. Synthetic rubber and chemical fertilizers also took a 10 percent hit as their sales volumes plunged 20 percent and 13 percent respectively.
The damages incurred by a tough first half have slowed many of the company's growth efforts. Although all 11 units of JCIC's ethylene project started up, enabling the company to further develop its production of downstream products, JCIC's board decided not to exercise its option to buy the seven facilities owned by its parent company, Jilin Chemical Group Corporation (JCGC) this year.
The company intends to evaluate the purchase after 1998. The option to purchase the units expires on December 31, 2002, or five years after the completion and acceptance of the project's last facility.
The purchase price will be determined on the basis of the net assets of relevant facilities and is subject to the approval of class shareholders. The decision to buy will rest on the operating profits of the facilities and the financial strength of the company.
As Mr. Qirong said in a recent interview with CMR, "The 11 plants are highly integrated, so if our financial situation is good, and even if one or two of the seven plants are not performing very well, we will still consider purchasing all the plants as long as the overall operating profits are positive."
JCIC has also decided to delay the planned issuance of 300 million A shares and will wait until market conditions become more profitable.
To combat the deteriorating market, the company will take advantage of JCGC's participation in the new China National Petroleum Corporation (CNPC). As a result, the company's supply of crude oil and sales of petroleum products will be partially guaranteed.
In response to this restructuring and the PRC's other economic measures, the company will increase its production of certain products and implement facility maintenance programs on a two-year cycle.
The company plans to enhance sales in the second half by adjusting product mix and developing new markets. Jilin also expects the PRC's new crude oil policy to help in the second half if oil prices remain low.
Despite the difficult environment, the company's plants ran in accordance with production schedules in the first half. The company processed 2.26 million metric tons of crude oil, representing an increase of 8.7 percent relative to the same period 1997. The company blames some low utilization rates at its facilities on equipment problems and adjustment periods for new products.
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