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Eric Ng

China Petroleum & Chemical (Sinopec) - the country's No 2 oil company - is expected to post on Monday a 44 to 50 per cent fall in net profit for the first half of this year, according to analysts.

A year-on-year fall of about 20 per cent in the oil and petrochemical giant's realised oil sales price to about US$20.10 a barrel was the main culprit for the profit decline, they said.

Losses at its chemical division and lower profit margins at its refining and marketing divisions were also to blame for the projected poor results.

The company is forecast to book an interim profit of 4.95 billion yuan (about HK$4.63 billion) by Merrill Lynch, five billion yuan by Goldman Sachs, 5.2 billion yuan by ABN Amro and 5.4 billion yuan by DBS Vickers Securities.

It posted an interim net profit of 9.58 billion yuan last year, based on international accounting standards.

Net profit in this year's first quarter plunged 86 per cent year on year to 542 million yuan.

ABN Amro, which met with Sinopec's management early this month, has forecast a 28 per cent year-on-year decline in operating profit of Sinopec's exploration and production division to 8.4 billion yuan.

First-half oil production volume was estimated at 134 million barrels - flat year over year, while natural gas production grew a mere 4.8 per cent to 83 billion cubic feet.

The company's refining segment was expected to see an 81 per cent year-on-year plunge in net profit to 518 million yuan, after making a loss in last year's second half, ABN Amro said.

Refining margins improved from US$2.12 a barrel in the first two months of this year to US$3.80 a barrel from March to June.

The Dutch brokerage said Sinopec was planning to cut its third-quarter refining volume to 27.6 million tonnes from an original target of 29 million tonnes.

The strategy would help lower its inventory level hopefully to 5.5 million tonnes by the end of this year, from about 5.8 million tonnes, it said.

ABN Amro expected the marketing division to report a 63 per cent year-on-year growth in interim operating profit to 1.6 billion yuan on the back of improved profit margins in the retail and wholesale levels.

However, the chemicals division was anticipated to post an interim loss of 512 million yuan as an expected second-quarter profit would not be able to offset the loss incurred in the first quarter.

Hit by the global economic slowdown and an influx of imports, the prices of chemical products fell between 3 per cent and 24 per cent in the first half, with the lowest prices recorded in January and February.

Analysts generally expected Sinopec to see a more profitable second half, on the back of a firmer oil price - supported by political tensions in the Middle East - and higher refining and marketing profit margins.

However, they said its second-half performance was highly dependent on the pace of the global economic recovery.

A spokesman confirmed Sinopec had signed an agreement with the Shandong provincial government to study the feasibility of co-investing in the construction of a crude oil refinery with annual throughput of 10 million tonnes. The main products include diesel and petroleum.

He said it was too early to tell the investment amount and schedule of completion as they depended on market conditions.

The China Daily  yesterday quoted an unnamed official at the province's Development Planning Commission as saying the refinery would cost eight billion yuan and was expected to be built in the eastern coastal city of Qingdao by 2005.

The proposed refinery would also include a gas-driven power plant, two chemical complexes and a natural gas pipeline network in the province, it added.

Analysts believe the refinery will replace smaller and older plants operated by Sinopec, as part of the oil and petrochemical giant's cost-efficiency drive.



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