Possibility of Cyclic Reduction for Chemical Sector     

As the global price of crude oil has constantly increased and hit a new historical high, the refining sector in China has suffered serious loss this year due to prices of oil products in Chinese market not in line with the global crude price. With the expectation of the economic decline both at home and abroad and the rising price of oil and raw materials in the international market, the cyclic reduction of the chemical sector will possibly come.
   According to China Petroleum and Chemical Industry Association, the refining sector in China suffered a loss of RMB23.924 billion in the first quarter of 2008. The surging crude price in the international market and the restricted prices of oil products in China have combined to lead to the first profit reduction in China's petrochemical sector since 2001.
   The CPI index was 8.3% higher in March and 8.0% higher in the first quarter over the same period of last year. Generally speaking, when the prices of oil products are up by 10%, the CPI index will increase by 0.2-0.3 percentage points. To avoid the further aggravation of inflation, therefore, it is not possible for the prices of oil products in China to be identical to that in the international market.
   To ensure the market supply of crude oil and oil products and compensate for the loss in Sinopec Group and CNPC, the Chinese Government has offered them subsidies this year, but the performances in these two companies has inevitably dropped.
   As the export tariff rate is increased, the exports of chemical fertilizers are restricted. Nitrogenous fertilizer and phosphate fertilizer producers are facing huge pressure on reduction of their profits. As more than 70% of potash fertilizers needed in China depends on imports, the additional 100% special export tariff has no impact on the potash fertilizers sector.
   The prosperity of the chemical sector is cyclic. When the macro economy and especially the fixed-asset investment have a high growth, the expansion and the profit growth in the chemical sector are gratifying. When the growth of the macro economy is slowed down, with stricter environmental protection requirements and raw material price rise, however, the chemical sector would start cyclic decline and have potential risks, and enterprises with low-level technology would possibly have difficulties in subsistence.