THE 96 per cent rise in net profit announced by the Shanghai Petrochemical Co yesterday is not as impressive as it sounds. Last year's profit of 870 million yuan (about HK$781.75 million) was only slightly less than the company's forecast of 900 million yuan, but at the time analysts said it was a conservative projection. James Capel Research, for example, just last week said it expected profits of 1.03 billion yuan. The results are therefore only a qualified success, and this marginal underperformance is not the only cloud on the horizon. But first the good news. Shanghai Petrochem is the largest petrochemical company in China and one of the country's 10 largest industries. It operates in a rapidly growing market, has customers in Shanghai who could be described as captive, and has the support of the state-run Sinochem company (the majority shareholder) and is in many ways a highly attractive prospect. Indeed, there are four particularly encouraging signs. The allocation of Shanghai Petrochem products sold within the state plan was reduced to 37 per cent from 59 per cent for last year. This is significant as state prices are 20 to 40 per cent below market prices. Furthermore, the company intends to sell the higher value products outside the plan. Crude processing will be raised to the plant's capacity. Some 4.6 million tonnes were processed last year - an increase of 14.4 per cent on 1992 - and there are plans to raise this to the maximum of 5.3 million tonnes. Direct sales to industrial companies increase to 24 per cent of total sales revenue, and the company plans to raise this to 40 per cent for this year. There are a number of improvements in the company's technology. The completion of an 800,000-tonne residual oil processing plant next year will enable the company to produce higher grade petroleum products such as light fuel oils and unleaded petrol and a 225 megawatt coal-fired plant will be commissioned in the third quarter of this year. Equally significantly, the company has begun upgrading production technology at its acrylic fibre unit, polyester staple unit and acrylonite unit, improving their productivity and product quality. But despite these positive developments some analysts see a number of flies in the ointment. One problem is that performance in the second half of the year was not as good as in the first half. The company made 574 million yuan in the period to June last year, but only 296 million yuan in the period to December. The 90.8 per cent rise in revenue between January and June was made up of a 65 per cent jump in output and sales and a 25 per cent increase in product prices. This period coincided with the unprecedented boom in the Chinese economy and August saw a 43-day shutdown for maintenance at the company's ethylene plant, but the result was a rather alarming 48 per cent drop in profits between the two periods. Another big concern is that the cost of crude oil - the company's principal raw material - will rise as the Government phases out the oil price subsidy. Crude is bought by Chinese companies at a level 40 per cent lower than world prices. Prices are scheduled to come in line with global norms by 1996. The purchase of crude oil accounted for about 57 per cent of total costs last year, up from 42 per cent in 1992. The average crude price rose to 651 yuan a tonne from 459 yuan in 1992. Sinochem was made the sole distributor of foreign crude when the two-month import ban was lifted last week, and, although it can be expected to support Shanghai Petrochem, there are other companies which will be pressing for a share of the limited stocks. Finally, there is the question of overmanning. This is common among state-run companies (which is what Shanghai Petrochem was before it listed on the Hong Kong stock exchange last year), and is acknowledged by the company's chairman as the greatest weakness. Restructuring is a problem which cannot be easily solved in the short term, but it is one which Shanghai Petrochem is tackling head on. The company has put 2,000 of its underutilised employees to work at its restaurants in Jinshan and Shanghai but most of its efforts are directed at expanding downstream operations, entering new businesses and starting joint ventures. Shanghai Petrochem also hopes to increase its exports but analysts say this is unlikely to be a successful strategy. The demand for its products does not come close to being met by supply, and in any case prices in China are likely to become higher than in the rest of the world as the economy continues to boom and the liberalisation of the economy boosts demand even further. - JULIAN BRUTUS Asia and Pacific editor The World Crude Report
