Coal stealing price edge on crude chemicals
But oil-based producers can compete through better, integrated technology to make a bigger range of products out of reach of their rivals
Producers of chemicals from crude oil will face keener rivalry from those that use coal as feedstock, given the solid fuel's price advantage.
But big integrated crude-based firms can still compete through better technology, according to Sinopec Shanghai Petrochemical.
Speaking after the firm posted a net loss of 1.15 billion yuan (HK$1.41 billion) in the year's first half, vice-chairman Wang Zhiqing said that to gain an edge, large firms with integrated oil refining and chemical plants needed to produce more products that coal-to-chemical producers struggled to make.
Sinopec Shanghai posted a net profit of 1.43 billion yuan in last year's first half. It runs the second-largest refinery of Asia's biggest oil refiner, Sinopec.
"The cost competitiveness of coal-to-chemicals producers is becoming increasingly apparent due to rising supply and declining prices of coal," he said.
"Integrated firms like us can produce more value-added products."
Most chemicals produced on the mainland are made from crude oil, which is processed to make fuels such as diesel and petrol, with naphtha as a by-product. Naphtha is then processed to produce base chemicals such as polyethylene and polypropylene, which are used to make a wide variety of plastics used in packaging materials, car parts and textile products.
In recent years, some coal producers, led by state-owned Shenhua Group, have built demonstration plants to turn coal into diesel, petrol, polyethylene and polypropylene, with methanol - a fuel itself and a key industrial product - being the intermediate product.
Shenhua chairman Zhang Xiwu said on Monday that its plant in Inner Mongolia, the biggest in the world, was more competitive than rivals that used crude oil as feedstock.
But he would not reveal the level of crude oil price above which Shenhua's plant would be profitable, citing commercial secrecy. The plant, which went into commercial operation in December 2008, was profitable in the first half of the year and Shenhua Group plans to sell it to its listed unit, China Shenhua Energy.
Wang conceded the competitive threat from firms like Shenhua was real since Beijing had put a lot of support behind the development of coal-to-chemical technology to reduce the country's reliance on foreign crude oil.
He said Sinopec Shanghai was optimising its product structure, such as producing more ethylene glycol, which coal-to-chemicals makers are still struggling to produce with consistent quality.
He also said crude oil-based chemical makers had the advantage in that their older facilities tended to be mostly depreciated on their accounts, while coal-to-chemical makers had to bear hefty depreciation charges on their profit and loss accounts.
Sinopec Shanghai's first-half loss was caused by Beijing's inflation-fighting policy to keep the pace and magnitude of fuel price rises behind that of crude oil, and a plunge in chemical prices due to weak demand.
Wang said the firm continued to suffer from refining losses last month and this month, albeit less steep than in the first half, adding that some chemicals saw a small rebound in prices.