Sinopec units sign supply contract
Lower logistics costs and stable prices are expected from the long-term deal
Sinopec Yizheng Chemical Fibre and sister firm Sinopec Zhenhai Refining & Chemical have entered into a long-term material supply deal that will cut logistics costs and enhance supply stability.
Yizheng, the mainland's largest and the world's fifth-largest polyester manufacturer by capacity, has agreed to buy from Zhenhai 30,000 tonnes of paraxylene (PX) this year, up to 250,000 tonnes next year and 300,000 tonnes in 2005.
The procurement costs will not exceed 240 million yuan (HK$222 million) this year, two billion yuan next year and 2.4 billion yuan in 2005.
PX is used in the production of purified terepthalic acid, which is then used to make textiles and plastic bottles.
Zhenhai operates the largest oil refinery in China, with a capacity of 16 million tonnes a year, and is the country's largest PX producer, with 450,000 tonnes of annual capacity. It plans to expand capacity to 550,000 tonnes next year. Both companies are subsidiaries of Asia's largest oil refiner, China Petroleum & Chemical Corp (Sinopec).
A Yizheng spokesman said the procurement volume from Zhenhai would amount to about half of its PX needs. The company had been sourcing PX mostly from foreign sources.
He said that although the procurement deal with Zhenhai would not result in lower PX costs because prices would be based on northeast Asian spot market prices and contract prices issued by Britain-based petrochemical prices data provider ICIS-LOR, logistics benefits would be reaped.
'As it will only take four to five days to transport the PX from Sinopec Zhenhai to us, we can carry a lot less inventory,' he said, adding supply and delivery would be more stable than imports. It takes several weeks for imports to arrive.
BNP Paribas Peregrine head of China research Eva Chu Wen-yee said lower inventory meant savings on carrying costs and flexibility in the deployment of working capital.
In other logistics cost-saving initiatives, Sinopec plans to spend 7.3 billion yuan in building three terminals and two oil pipelines to transport imported crude oil to its refineries.
They include a 791km pipeline from Ningbo to Nanjing via Shanghai and a 1,050km line running through Nanjing and Hubei and Hunan provinces.
A 1,690km pipeline under construction will send refined oil from its refinery in Maoming, Guangdong province, to the markets in Guangxi and Guizhou provinces in the west.