Brief role model faces exit after failure to deliver
A firm hailed as a role model for the state sector in its struggle to compete with foreign rivals could soon disappear under an industry restructuring.
Newly formed China Eastern United Petrochemical Group is expected to be dissolved after Beijing announced a massive overhaul of the oil and petrochemical industry at the National People's Congress (NPC) last month.
China Eastern - formed in November from the merger of five petrochemical enterprises in Nanjing - had been promoted as a role model for state enterprise reform by encouraging the establishment of mainland conglomerates to compete against foreign firms, including domestically based foreign-invested enterprises.
It was the mainland's first cross-ministry merger.
Four of the enterprises - Yizheng Chemical Fibre, Yangzi Petrochemical, Jinling Petrochemical and Nanjing Chemical - had been blamed by Beijing for overlapping investment in the Nanjing area.
Under the restructuring, two fully integrated petroleum and petrochemical groups are expected to be formed - one for the south and one for the north - by revamping assets among China Petrochemical Corp (Sinopec), China National Petroleum Corp (CNPC) and the chemical ministry.
No mention has been made of the role China Eastern would play.
A China Eastern spokesman said the group had succeeded in eliminating overlapping investment. 'But it will take a longer time to see if the merger will solve the problems of intra-group supply of raw materials,' he said.
Last month, Yizheng said it was scrapping a project for manufacturing paraxylene - a chemical also made by Yangzi.
Yizheng has also promised to procure more polyester raw materials from Yangzi - a means of ensuring supplies.
Despite such progress, analysts believe China Eastern has continued to fall short of its promise.
ING Barings Securities senior investment analyst Alexandra Conroy said: 'China Eastern is an experiment, but this experiment does not work. I expect it to be absorbed in the south and north split.' She said there was not much synergy among the enterprises which, drawn from different state entities, have continued to run independently.
China Eastern ran contrary to Beijing's aim of fostering competition in the sector - the rationale behind the NPC proposals to establish south and north groups, each with upstream and downstream operations.
Upstream oil exploration and downstream refining and petrochemical operations traditionally had been divided between CNPC and Sinopec.
'If that's the case, China Eastern is against that. In order to increase competition, other companies should be allowed to supply to Yizheng at the lowest price,' Ms Conroy said.
She said there were potential conflicts of interest between Yizheng and Yangzi because both were listed companies, responsible to shareholders.
While Yizheng seeks to buy its materials at the lowest prices, Yangzi wants to secure the highest prices to maximise profits.
'I don't anticipate any benefit in cost [from this arrangement] to Yizheng,' she said.
Dredsner Kleinwort Benson Securities (Asia) chief of China research Ann Shih said the south and north groups would also face problems.
'Theoretically, there are synergies. The issue of regionalism remains strong. I'm afraid that even after the merger, all factories will work on their own,' she said.
For example, Sinopec's subsidiaries had continued to work independently although the group was formed in the early 1980s.
'The sector needs economies of scale because all refining and ethylene capacities are too small, so Beijing thinks of a merger. The industry needs [an] oligopoly.' She expected after the merger, CNPC would be more willing to cut domestic crude prices because downstream production could subsidise upstream exploration.
