Sinopec Unlikely to Enjoy Global Oil Price Slump

From Corporation, page 25, issue no. 390, October 27, 2008
Translated by Ren Yujie
Original article: [Chinese]

With oil prices slumping as the global economy downshifts, Sinopec, China's state refiner, is racking up losses due to an oil product surplus it imported over the past nine months when oil prices were in a crescendo.

The EO learned that by the end of October, the company had around 4.5 million tons of petrol and diesel on hand worth 30 billion yuan, an inventory 50% higher than the normal.

Chinese customs data showed China imported a huge quantity of oil products between May and July. For July alone, the country imported 610,000 tons of petrol and 970,000 tons of diesel.

A source from Sinopec’s sales branch in Beijing told the EO that at the time, most people anticipated retail prices to rise after the Beijing Olympics. In order to guarantee supply during Games, the company bought a large amount of oil from oversea despite the high prices.

Oil was in short supply at that time also because most local refiners had ceased production and many speculators had hoarded oil, said the above source, adding stocked oil now had become a major reason for the current surplus.

Sinopec began to dispose of stocked oil products since late August. It lowered petrol imports to 123,000 tons in September and stopped importing oil in October, said the source.

He added that purchases in the domestic market were also reduced too. The company planned to purchase 420,000 tons of petrol and diesel in October, contrasting with monthly purchases of more than one million tons in the first half of the year.

Despite this, the EO learned that the company's inventory was only lowered by 900,000 tons over the past two months. Li Yu, an analyst for Oilboss.cn, said dealers were reluctant to buy in as hoarders undersold their oil.

In an attempt to prevent price slumps and stablize the market, Sinopec announced it would raise the transfer prices for oil among local sales companies by 50 to 100 yuan per ton in late September.  

Less than a month later, however, it decided to cut the transfer prices for diesel by 150 per ton.  "The company has realized how harsh the market is now. There would be too much pressure for sales companies if it kept wholesale prices high," said a source from Sinopec who wished to remain annonymous.

A refinery plant owner in Dongying, Shandong province said once international oil prices dropped to USD 80 per barrel, local refiners could be more competitive than the state giant. He revealed that the average wholesale price offered by local refiners was 1,000 yuan lower than that of Sinopec.

According to a Sinopec employee, the crude oil used by the company at present was imported at USD 115 per barrel. The company's strategy was to speed up the sale of stocked oil and make up for losses caused by high-priced crude oil.

Therefore, lower international oil prices would not help to improve the company's third-quarter revenue. By the estimate of a source from a Sinopec refinery branch, the company might lost 30 billion yuan from refinery businesses in the third quarter.