29 April 2009 07:16 [Source: ICIS news]
By Bohan Loh and Judith Wang
SINGAPORE (ICIS news)--The outlook for the chemical business for China's Sinopec remains bleak for the rest of the year but a lucrative refining arm would cause Asia’s largest refiner to beat its own first-half profit forecasts, analysts said on Wednesday.
“The new pricing mechanism implemented by the government and low crude prices will hold the company’s earnings up. But the outlook for the petrochemicals business still isn’t very bright,” said Grace Liu, an analyst with brokerage, Guotai Junan Securities.
The Chinese state-owned major reported a 85.1% surge in its first quarter net profits, that was largely due to improvements in refining margins, to yuan (CNY) 11.2bn ($1.64bn) late on Tuesday and issued a profit guidance saying that it was expecting a more than 50% increase for its first half net profit.
“I predict Sinopec’s profits in first half will double from the earnings of its refining segment amid lower international crude oil values,” said Li Guangzan, an analyst from Hangzhou-based Founder Securities.
The Chinese government’s new fuel pricing mechanism that took effect on 18 December 2008 provided for a review of refined oil products prices against international crude prices every 20 days.
Analysts had said at the time that the refining businesses of Sinopec and rival PetroChina would return to profitability following the implementation of the fuel pricing mechanism without which the two state-owned giants were incurring millions of dollars of losses each year.
But the prospects for Sinopec petrochemical business were in stark contrast to what was expected of the company’s refining arm.
“Profitability from the chemical arm will not improve much, as the demand still seems lacklustre due to new capacities expected to come on stream throughout the year,” said Li from Founder Securities.
Chemical prices would likely be volatile this year due to the unstable demand, he added.
Liu from Guotai Junan noted that revenue contribution from Sinopec’s chemical arm had decreased from 20% in 2003-2005 to just 15% for the whole of 2008.
“The situation in the western economies and the emergence of the swine flu is putting strain onto the chemical businesses and its recovery,” Liu said.
“The drop in across Sinopec’s chemical production volumes during the first quarter clearly shows weak demand in the domestic market,” said Wang Aochao, an analyst with brokerage UOB Kay Hian.
The company reported a drop in production volumes for almost all its chemicals for the quarter. Ethylene production declined more than 12% while manufacture of synthetic rubbers and polymers tumbled 12.3% and 13.6% respectively.
Sinopec’s senior vice president and chief financial officer, Dai Houliang, attributed the drop in the production numbers to “weak demand during the quarter”.
But Dai said that the three months of the first quarter were a good period to bring forward scheduled maintenance. He was speaking at an analysts conference earlier on Wednesday.
Dai said the company was also actively considering overseas acquisition and expansion opportunities and would disclose more details on a timely basis. Sinopec had recently acquired Canadian firm, Tanganyika Oil Co Ltd, for Canadian dollar (C$) 2.07bn as it seeks to expand its overseas presence.
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