China energy giant Sinopec braces for demand drop as transport is shut down globally to halt coronavirus spread
- Energy giant unveils better than forecast 6.7 per cent fall in 2019 profit
- Mainland China fuel demand is projected to recover to normal levels in second half, company says
China Petroleum & Chemical, or Sinopec, the world’s largest oil refiner by capacity, is bracing for a hit to demand for its facilities and exports, as governments around the world respond to the novel coronavirus pandemic by locking down transport networks.
Demand for its facilities, or its average refining capacity utilisation, fell to 66 per cent last month from 91 per cent in January, senior vice-president Ling Yixiang said during a teleconference on Monday, a day after the energy giant unveiled a 6.7 per cent fall in its 2019 profit.
“We are expecting a recovery in the second quarter, although it will be impacted by lower exports given the pandemic has hit overseas fuel demand,” he said. “Overall for the full year, utilisation will be impacted.”
In mainland China, fuel demand is projected by the company to “basically recover to normal levels” in the year’s second half, he added.
Governments in all major economies have imposed various degrees of restrictions on people’s movement in an attempt to slow the rapid spread of Covid-19, the worst public health and economic crisis globally in a generation. Demand for petroleum products used as fuel for vehicles and aeroplanes has dived, as a result.
On Sunday, Sinopec reported a net profit of 57.5 billion yuan (US$8.1 billion) for last year, down from 61.6 billion yuan in 2018. It was 3 per cent higher than an analysts’ consensus estimate of 55.8 billion yuan, according to senior Sanford C. Bernstein analyst Neil Beveridge. He forecast this year’s profit to fall by 57 per cent to 24.5 billion yuan. A final dividend of 19 fen per share was proposed, making it a full-year payout of 31 fen, down 26 per cent from 42 fen in 2018.
Zhang Yuzhuo, Sinopec’s chairman, said crude oil prices were likely to remain at low levels for longer than expected. “Recently, the average of over 10 investment banks’ forecast we monitored was US$42 a barrel for this year,” he said. “But last week, some have slashed their projections in light of the latest pandemic situation.”
Crude has fallen to just above US$20 a barrel in New York from US$45 at the start of the month, after Saudi Arabia unleashed a price war following a breakdown in talks with Russia to curtail output, while the coronavirus outbreak has worsened.
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The downturn will hit refiners that use coal as feedstock – many are in China – particularly hard, as some projects will be uncompetitive at US$50 a barrel while others will be loss-making at US$35, Zhang said.
Sinopec has three coal-to-liquid fuel plants whose break-even points range between US$35 to US$40 a barrel. “We expect Sinopec to see a strong recovery [in profitability] in the year’s second half, with low oil prices supporting downstream profit margins,” Sanford Bernstein’s Beveridge said. “With a low debt [burden] and a high dividend payout ratio, Sinopec is one of the most defensive oil majors.”
He, however, reckoned Sinopec needed to make deeper project spending cuts, more than the 2.5 per cent cut to 143.4 billion yuan provisionally planned.
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Given the uncertainties, this year’s project spending budget had yet to be finalised and will be adjusted according to the pandemic’s development, Zhang said.
Sinopec shares traded 2 per cent higher at HK$3.71 at 3.28pm, outperforming the Hang Seng Index’s 1.2 per cent decline.
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