Shanghai Petrochemical hopes recovery will offset rising costs

PUBLISHED : Friday, 27 August, 1999, 12:00am
UPDATED : Friday, 27 August, 1999, 12:00am

Shanghai Petrochemical, the mainland's largest petrochemical company, expects an industry recovery will help offset rising crude-oil costs.

The cost of crude oil accounts for 45.1 per cent of the H share's total cost of sales.

A one percentage point increase in crude-oil prices will trim revenue by roughly 0.5 of a percentage point.

International crude-oil prices started to pick up from the decade's nadir of US$10 per barrel at the start of the year following a March meeting of the Organisation of Petroleum Exporting Countries.

They stabilised at $16-17 a barrel in the second quarter, but rose to $20 last month.

Vice-chairman Xu Kaicheng said yesterday the second-half crude-oil costs would be higher than the first, judging from the latest monthly trends of international crude oil prices.

Shanghai Petrochemical paid an average of 939 yuan (about HK$875.8) a tonne for crude oil in the first half, down 6.7 per cent.

Mr Xu said he believed the expected surge in product prices, accompanying the faster than expected recovery of the Asian economy and the resulting improvement in petrochemical demand, would help ease some pressure from the company.

'We are pretty confident about the second half's outlook,' Mr Xu said, pointing to the company's cost-control efforts, the wider use of cheaper crude oils, and capacity expansion projects.

Product prices saw strong growth last month compared with levels in January.

Polyester fibre leapt 20 per cent to about 8,000 yuan a tonne; acrylic staple, up about 2 per cent to 9,000 yuan; polyester chips up 15.8 per cent to 6,600 yuan a tonne and polypropylene advanced about 2.38 per cent.

Company vice-president Rong Guangdao said the mainland's petrochemical industry had bottomed out, as the sector was now running at the tail of its cycle.

Mr Rong said its return on net assets - an indicator of profitability - was low compared with international counterparts.

The H share now yields 1.86 per cent of net profit over its net assets - a far cry from the mainland's benchmark borrowing costs of 5.85 per cent per year.

Mr Xu said it was awaiting Beijing's approval to obtain interest subsidy on a number of expansion projects.