China petrochemical companies financial results

08 May 2009 12:32  [Source: ICB]

Demand in China will be better than the second half of last year, but it could have hardly have been worse. Government spending should provide a boost

CHINA'S PETROCHEMICAL companies will post earnings and turnover improvements in 2009, thanks to cheaper feedstock and improved domestic demand, say analysts.

"Demand will improve due to the government's economic stimulus efforts starting to take from March," says Fang Jun, a chemical analyst with Shanghai-based brokerage firm Essence Securities.

But the demand recovery will only be relative to the collapse of markets in the second half of last year, the analysts add.

Growth is unlikely to recover to 2007 levels during this year, they warn.

Li Guangzan, a chemical analyst with Founder Securities, based in Hangzhou (capital of Zhejiang province), says that while month-on-month performance will improve, year-on-year returns will not, because of the global economic crisis.

Most of the companies have already seen big profit declines from 2008.

Sinopec - Asia's largest refiner and a big petrochemical player - reported a 47.3% drop in 2008 net profit to yuan (CNY) 29.8bn ($4.36bn) over the previous year.

GOVERNMENT RESTRICTIONS CITED
This was largely due to government restrictions on diesel, gasoline and other fuel prices which prevented the company from passing on the full cost of rising crude to customers.

The surge in crude during the first half was then followed by the collapse in both the price of oil and the demand for chemicals in the second half. PetroChina, the country's second-biggest refiner and petrochemical producer, fared better. It posted a 22% fall in net profit to CNY114.43bn on an increased domestic windfall tax on crude oil, the cap on domestic fuel prices and the economic crisis.

China's leading chlor-alkali player, Shanghai Chlor-Alkali Chemical, saw net profit tumble by 80.81% to CNY10.8m due to rising feedstock costs in H1, followed by the second-half collapse in polyvinyl chloride (PVC) and chlorine prices.

Sinopec, Shanghai Petrochemical Co. (SPC) and Yizheng Chemical Fibre have expressed confidence that their first-quarter results will benefit from lower oil prices.

Sinopec is expecting a jump of more than 50% in net profit from the CNY6.7bn recorded in the first quarter (Q1) of last year. This would be the result of its refining operations returning to profitability.

In early April, Sinopec said that its chemical segment had returned to profitability in the first two months of 2009 on the rebound in pricing.

"The year's good beginning is the result of the big price gap between naphtha and chemical products due to low naphtha prices," said Wu Haijun, director of Sinopec's chemical segment.

"However, this may not last as the petrochemical market is entering a trough."

The company incurred a huge loss in chemicals between August and December 2008, compared with a profit for the first seven months of the year.

"As a result of the significant decrease in oil prices, the group's crude-processing costs have gradually dropped in recent months," said SPC in a statement issued with its Q1 forecast.

The company added that the fall in petrochemical pricing may have reached the bottom.

Yizheng Chemical Fibre says it has benefited from lower crude, the reduced cost of polyester raw materials, a cost-cutting drive and closely matching production with demand.

THE FEAR OVER PRICE RISES
China announced stimulus packages for 10 industries in January and February, including petrochemicals, automotive, textiles and garments, electronics and information technology.

Full details of the spending planned for petrochemicals are due to be released in mid-2009.

Direct spending on petrochemicals will involve speeding up the construction of new refineries and petrochemical plants, raising concerns over near-term oversupply.

Other government stimulus initiatives are already taking place, such as increased bank lending and discounts off the cost of home appliances for rural residents.

Many analysts fear that recent chemical price increases have been driven mainly by a recovery in feedstock prices, tight petrochemical supply resulting from refinery and petrochemical operating rate cuts and some restocking by end-users.

While feedstock costs remain cheaper than the all-time highs of the first half of 2008, crude and naphtha prices have rebounded from the huge declines since in Q4 last year. Refinery and petrochemical operating-rate cuts took place in Q4 last year and during Q1, following last year's economic collapse.

"In the near term, demand (for consumer goods) will not bounce back," says Arden Dai, a Shanghai-based chemical analyst with global research and consultancy firm Frost & Sullivan.

But chemical analyst Fang Jung stresses: "We should have confidence in the sector. I think chemicals for auto production will recover first followed by chemicals for home appliances. "The demand for construction chemicals will also gradually improve."

THE DECLINE IN EXPORTS
"Chemicals exports accounted for around 6% of total exports and around 2% of GDP in 2008," says Wang Aochao, a Shanghai-based analyst with investment consultancy UOB Kay Hian. "We don't pin much hope on exports. There will likely be no improvement until end-2010."

China has hiked export-tax rebates on semi and finished goods six times since the second half of last year, because of the fall in overseas trade.

March exports fell at a slower pace year-on-year, but still declined for the fifth consecutive month, according to data released by China Customs.

From April 1, China increased export-tax rebates on an extensive list of products including textiles and garments, steel, nonferrous metals, petrochemicals, electronics and light-industrial products.

"I think the measures will boost exports to a certain extent, but the most important factor is still demand. If overseas demand does not improve, exports will continue to shrink," says Wang Xixin, a Wuxi-based chemical analyst with Guolian Securities.

Rebates were raised on April 1 for polyols, PVC and styrene butadiene rubber (SBR) exports.

The increases are unlikely to deliver any immediate boost because of weak overseas demand, say local traders and producers.

China's chemical exports slipped by 31.5% to $6.04bn in January over the same month in 2008, says the China Petroleum and Chemical Industry Association.

GOVERNMENT SUPPORT
China's petrochemical majors are a crucial source of tax revenue and big employers.

As a result, sources indicate that they will be given the necessary government support to avoid bankruptcy, with Beijing likely to lead any restructuring initiatives.

Small and medium-sized chemical players may not be so lucky and will have to reduce manpower levels, warn analysts.

End-user demand for chemicals has been hit hard by the fall in exports, with overseas orders for textiles and garments and toys having fallen very sharply.

In early February, a government official said that the number of jobless migrant workers was 20m, 15.3% of the total of 130m migrant workers.

Further pressure on low-value chemicals and finished-goods producers is likely to be exerted by tougher environmental regulations. These are being designed to boost energy efficiency and phase out old, highly polluting technologies.

China is examining introducing an environmental protection tax, says Zhang Lijun, vice-minister of China's Ministry of Environmental Protection.

Coastal provinces are likely to adopt stricter regulations, leading to some companies moving inland, adds Fang Jung.

In a sense, then, this is the worst of times and the best of times for China's petrochemical industry. Domestic demand may improve as a result of government spending relative to the second half of 2008, but the collapse in exports will continue to be a major drag on earnings.

State funding will soon be available, though, for big investments in new capacity and improvements in efficiency - part of efforts to boost the overall economy.

It is a question, therefore, of riding out the current very difficult conditions while taking advantage of opportunities to strengthen positions in the longer term.

CBI is a joint venture with ICIS, and the largest integrated service provider in Chinese commodity markets.

 

MIXED PICTURE ON TRADE OUTLOOK

Bohan Loh/ICIS news/Singapore

China March chemical imports surge; volumes may slow from April

China's imports of most petrochemical products surged in March from a year earlier as local manufacturing industries felt the positive effects of the government's aid, but the strong volumes may not be sustainable, analysts said last week.

The hazy recovery prospects of its major trading partners in the West will likely curb petrochemical volumes headed towards the mainland from this month onwards, they said.

"I expect production, import, exports for chemicals to grow mildly on a year-on-year basis for April and May," said Wang Aochao, a petrochemical analyst with brokerage UOB Kay Hian.

Analysts attributed the spike in March import volumes to the Chinese government's yuan (CNY) 4 trillion ($585.65bn) stimulus package, which is continuing to work its way into the domestic economy and the recent easing in access to credit.

The country's appetite for various petrochemicals, along with tight supply, has helped product prices to recover from the sharp slump seen late last year.

Ethylene gained over 22%, while propylene jumped by 54% from the beginning of the year before slightly retreating in recent weeks, according to data from ICIS pricing.

"If you want to see sustainability in China, the economy in US and Europe must stabilize. But now, the recovery route still isn't clear and there isn't momentum to keep growth up," said Grace Liu, an analyst with brokerage Guotai Junan Securities.

By: Judith Wang
+65 6780 4359

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