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Sinopec confirms move into China’s New Normal economy

Chemical companies
By Paul Hodges on 25-Mar-2015

Sinopec Mar15Sinopec, China’s largest chemical company, has just published its operating results for 2014.  We don’t yet have all the details, but the chart above highlights the key points of its cumulative performance since it first filed public accounts in 1998:

  • It has invested Rmb 288bn ($41bn) in capital expenditure for refining, and Rmb 239bn ($33bn) for chemicals (blue columns)
  • It has lost Rmb 75bn ($11bn) at EBIT level in refining, and made just Rmb110bn ($15bn) in chemicals (red)
  • Overall in refining and chemicals it has invested $74bn in capex, for a total operating profit at EBIT level of $4bn
  • And it does not slow down when markets are bad: average operating rates are above 100% for ethylene/propylene since 1998

No Western company would dream of investing $74bn over 16 years for a total return at Earnings before Interest and Tax level of just $4bn.  But Sinopec is not a Western company.  It is 73% owned by the Chinese government.

Its mandate is to be a reliable supplier of raw materials to downstream users, to maintain employment and boost living standards.  As such, it has no plans to cut back its expansion despite its poor financial results.  Instead, it will be investing Rmb28bn of capex in refining this year, and a further Rmb16bn in chemicals.

But 2014 did show one major change from the past, namely that Sinopec published its first-ever environmental report, showing how its performance has begun to improve since 2010.  Clearly this is a direct result of China’s New Normal policies, and the need to respond to concerns over pollution.  Unfortunately, as often happens with first reports in this area, there is no scale given for the level of reductions, but no doubt this will come next year.

Sinopec Mar15aThe Report is also important for its updating of Sinopec strategy, as shown in the chart above.  In another example of the changes caused by the New Normal policies, it plans to move further downstream in its main value chains, following the example of China’s smartphone manufacturers such as Xiaomi .

In chemicals, this means a “transition towards high-end materials and differentiated fine chemicals”.  It will also increase R&D investment, promote innovation-driven development, and establish an integrated service platform.

It would be very unwise to assume that these plans are unrealistic.  Since 2000, after all, it has achieved 8% compound annual growth in gasoline production (from 20 million tonnes to 51 MT), and 12.5% in ethylene (from 2MT to 11MT).

Sinopec’s latest Report thus confirms major change is underway in China under its New Normal policies.  Companies and investors stand to lose a lot of money, if they imagine that the future will be similar to the past.

By 2020, China will no doubt be a major exporter of many petrochemicals, as it is already for PVC.  And it will likely also be a significant player in specialty/fine chemicals.