Sinopec unit to reduce output by 13pc

Shanghai Petrochemical aims to narrow losses amid state curbs on selling prices

Sinopec Shanghai Petrochemical, which operates China Petroleum & Chemical (Sinopec)'s second-largest oil refinery by capacity, plans to cut output by 13 per cent this year to reduce losses amid ongoing domestic control on selling prices.

Chairman Rong Guangdao said the company expected to produce about 3.95 million tonnes of petrol, diesel and kerosene, down 600,000 tonnes from last year.

Shanghai Petrochemical would be better off shutting down its refinery as it was losing 6.54 fen for every yuan of refined oil sales before fixed costs.

It booked a 1.2 billion yuan loss from refining business in the first half, dragging the firm's overall profit down by 99.68 per cent.

Its average first-half crude procurement cost surged 29 per cent year on year to US$64 a barrel, while it was allowed to raise its average refined oil price by only 20 per cent to 3,710 yuan a tonne.

Mr Rong said the company still had to fulfil the minimum production quota required by the government to satisfy demand to avoid economic and social disruption.

'The government, through our parent Sinopec, has requested that we produce a certain level of fuel to ensure sufficient supply despite our losses,' he said.

Shanghai Petrochemical expects to process 9.1 million tonnes of crude oil this year, 4.21 per cent less than 9.5 million tonnes last year, according to chief financial officer Han Zhihao.

This is despite expansion of its refining capacity to 14 million tonnes from 8.8 million tonnes last year.

Mr Rong said the company's petrol and diesel selling prices would need to rise by 600 yuan a tonne or 14 per cent to 16 per cent from its average in the first seven months to break even.

Prices would have to be raised by 1,000 yuan or 23.1 per cent to 26.5 per cent to match the Asia benchmark price in Singapore.

He said Beijing had intended to launch a new pricing mechanism in the first half to allow refiners to pass on higher crude costs to consumers but the plan was derailed by surging crude and refined oil prices.

'It was pretty much prepared to do it, but the wider the price differential between domestic and overseas refined oil prices, the more difficult it was to launch as it must consider affordability of downstream agricultural sector and public utilities,' Mr Rong said. 'When the differential narrows, it would be a good time to launch it.'

The company cut the number of its workers by 1,154 in the first half to 24,000. It expects the full-year reduction to exceed 2,000.

Its shares dropped 2.65 per cent to close at HK$3.67.