Can Refining & Chemical Sector Gain Profits?

In the fall of 2006, there is also a feeling of coolness in the
international oil market as if it was also influenced by the
climate. The oil price in the international market went all way
down in September. The price of light crude oil futures for
October delivery in New York Mercantile Exchange dropped to
US$61.66 per barrel on September 19th, nearly US$16 per barrel
down compared with August and also being the lowest closing price
after April 6th, 2006.
   Refineries in China are of course very happy to hear it. It
is self-evident that the crude oil price drop will directly
reduce their production cost and minimize their loss. "China
implements the oil product price inter-linking mechanism," said
Deputy director of Pricing Commercial Information Division of
CNPC Refining Segment. "If the crude oil price can further reduce
to US$60 per barrel, at least there will no longer be the
irrational price relationship between the wholesale and the
retail sale of gasoline."


Has US$80 per barrel already gone far away?

"As a matter of fact, after the passing of the September-October
brisk season, the international crude oil price has a seasonal
downslide every year," said an energy analyst from Beijing Cifco
Futures Co., Ltd. "Due to various factors the reduction margin
is quite large in 2006 and it is of great help to domestic
refining & chemical companies."
   The drastic rise of the international oil price several
months ago, however, sent refineries into difficult situation.
On July 14th, the international oil price in New York market
created the highest record of US$78.4 per barrel. The price of
Brent crude oil futures hit a historical high of US$78.65 per
barrel only with a small step to US$80 per barrel.
   Why was the target of US$80 per barrel just missed? According
to experts, the concentrated easing of the geopolitical
situation is one of the major factors for the oil price drop and
the major change in the energy policy and attitude of the United
States is another. The Congress Report published not long ago
points out that the United States will gradually shake off the
dependence on oil from the Middle East.
   Chevron, an oil giant of the United States, disclosed to the
outside world on September 5th that it has discovered a huge
oilfield with reserves of 15 billion barrels in the Mexico Bay.
It is the largest oilfield so far discovered in the United States.
The discovery will increase the crude oil reserves in the United
States by 50%.
   According to analysts, the reason for the United States to
choose this time to release the news is to use the opportunity
of seasonal oil price downslide to further suppress the oil price.
The US Administration is intent on controlling the international
crude oil market.
   Besides, the US Administration also started to emphasize
energy cooperation, especially with China. The Seventh Sino-US
Oil/Gas Industry Forum was held in Hangzhou of Zhejiang province
on September 13th. The two countries once again started dialogue
about energy policy and also agreed to take the enhancement of
energy efficiency and the development of new energies and
renewable energies as focal fields for energy cooperation
between the two countries for a considerable period of time in
future. Without doubt, the cooperation between China and the
United States in the energy sector will produce a strong awesome
effect on oil producing countries.
   Besides, good weather has also given blessings to worldwide
refining & chemical companies. There have been no huge
hurricanes in the North Atlantic and no damages to oil/gas
production facilities in the Mexico Bay of the United States.
The oil production in the territory of the United States is going
ahead smoothly and the commercial inventory of oil products is
increasing stably. All these have effectively suppressed the oil
price rise.

How much is the loss?

The refining sector is the largest beneficiary of the sustained
crude oil price drop in the international market. According to
an expert from the Refining Division of PetroChina Planning &
Engineering Institute, refining is a sector with thin profit
today. An international crude oil price drop of over US$10 per
barrel is a turning point with a considerable profit margin for
refineries based on imported crude oil.
   Experts from Sinopec Zhenhai Refining & Chemical Co., Ltd.
say that it has to take some time before the oil price is
reflected in the production. To be more specific, it needs two
or three months for crude oil to be shipped from oil producing
areas to Ningbo Port. Crude oil being used in the company today
is high-priced oil purchased several months ago and crude oil
purchased after the price drop will be used only after several
months. To what extent can the oil price drop mitigate the loss
in the company can not be seen until the end of 2006. It is
therefore hard to say today whether the company can make a
radical change of the situation. It is reported that by the end
of June 2006 when there was an overall loss in the refining sector,
Sinopec Zhenhai Refining & Chemical Co., Ltd. managed to gain
a profit of over RMB30 million. In the following two months,
however, the high oil price caused a great loss of nearly RMB100
million in the company.
   According to CNPC, the sustained downturn of the oil price
will surely reduce the loss, but financial statements have yet
made no reflection. If the crude oil price can maintain at US$60
per barrel, there will be no longer the irrational price
relationship between the wholesale and the retail sale of
gasoline, but the loss in diesel production will continue to
last.
   The main reason is that the price of gasoline is much higher
than that of diesel. The ex-factory price of gasoline today is
around RMB5 200 per ton whereas the quotation price of diesel
is only more than RMB4 500 per ton. The retail sale price of
gasoline is also higher than that of diesel. There is no great
possibility for the retail price rise of oil products in China
in near future.
   The petrochemical sector is another beneficiary of the recent
crude oil price drop. With the cost reduction, the
profit-earning ability of downstream products such as plastics,
rubbers and chemical fibers can hopefully improve.
   Take chemical fibers for instance. The overall situation of
the chemical fiber sector has improved in 2006. The chemical
fiber sector is at a stage of restorative growth, but the profit
is still determined by the cost of upstream raw materials.
According to statistics, the raw material cost in the chemical
fiber sector accounted for 85% of the production cost in the
first half of 2006. We can therefore see how greatly the chemical
fiber sector is influenced by the oil price factor. Since the
oil price drop, therefore, there have been evident signs for
improvement in the chemical fiber sector. The main-business
revenue and the profit in quite a few listed chemical fiber
companies have grown by different degrees.


How long can the benefits last?

It is however possible that the good fortune of refining &
chemical companies has come quickly and may go quickly.
   According to a researcher from Galaxy Securities Co., Ltd., <