Competition for China's retail market share is heating up between the country's two biggest petroleum companies.
China National Petroleum Corp. has intensified its efforts to expand and consolidate its position for oil products sales in eastern and southern China-traditional strongholds for China Petrochemical Corp. (Sinopec).
Among the string of expansion measures are the equity acquisitions and consolidation of local terminals and storage facilities and setting up a petroleum exchange in the region.
CNPC now owns and operates six oil products terminals in the two regions, with a combined capacity of 600,000 cu m, and has a retail sales network capable of handling about 20 million metric tons/year of products in eastern and southern China.
Early in August, CNPC launched a petroleum exchange in Shanghai for spot trading of China-produced crude oil, natural gas, and key petrochemicals. A $2.4 million joint venture of CNPC and Shanghai Commodity Exchange, the Shanghai Huayou Petroleum & Chemical Exchanges is seen as a major step toward CNPC's goal of establishing a foothold in eastern China's oil products markets. Later, CNPC plans to implement spot trading of gasoline, diesel, and kerosine at the exchange.
Building market share
To consolidate its marketing stronghold in eastern and southern China, CNPC in mid-August set up a joint venture with Ningbo Port Authority (NPA) in East China's Zhejiang province to own and operate local jetties and oil products storage facilities.
CNPC Ningbo Storage Co. Ltd., 75% owned by CNPC, operates 142,000 cu m of oil products storage capacity and has access to NPA's deepwater receiving terminals.
Meanwhile, CNPC, encouraged by recent reforms to China's fuel oil import system, is establishing a foothold in Guangdong's fuel oil market by seeking retail partnerships with local traders.
The government is looking at a plan that CNPC and Sinopec have proposed to centralize fuel oil distribution by delegating fuel oil import authority to the two companies starting next year.
Guangdong is China largest fuel oil consumer, using about 15 million tons/year of fuel oil, or about 50% of China's total fuel oil consumpation.
CNPC and Sinopec are likely to get more than 50% of the 7 million tons of fuel oil import quotas for second half 1999.
According to an official with CNPC's retail sales unit, the company has the needed infrastructure in place, "has done its homework," and is ready to compete with rival Sinopec in oil products marketing.
Strategy
Market growth is of vital importance to CNPC, because the company produces more oil than what is consumed, in equivalent products, in the regions where it operates, the official said. He contends that adding market share in the east and south is a "survival necessity" for CNPC.
In a 1998 industry overhaul, China designated 19 provinces in eastern and southern China to Sinopec as the market base for its oil products sales. In the same move, the government has allocated 12 provinces in northeastern and northwestern China to CNPC as its market base.
In China, the landlocked northeastern and northwestern regions are rich in crude oil resources but are economically less advanced, thus consuming less oil products.
On the other hand, the coastal eastern and southern parts of the countries, recognized as China's economic powerhouses, are scarce in hydrocarbons but account for 80% of China's oil consumption.
CNPC produces 48% of China's 95 million tons/year of oil products, while consumption in its controlled market accounts for only 20% of the national total. This means CNPC has to scout for the outlets for about 20 million tons of its oil products in Sinopec's territory.
For Sinopec, it has been trying to block CNPC's marketing activities within its boundary by trying to buy CNPC products wholesale for retail sales in its market base, which CNPC rejects.
WTO entry
Both CNPC and Sinopec are jostling for increased retail market share of oil products before China enters the World Trade Organization.
China will be likely committed to full liberalization of its retail market 3 years after China enters WTO and of its wholesale market 5 years after WTO entry.
CNPC and Sinopec both need to sharpen their competitive edge before foreign products are allowed to be marketed in China. The companies will need a lead time of 3-4 years to complete the process of market consolidation.
China's negotiations to join the WTO were stalled following the North Atlantic Treaty Organization's accidental bombing of the Chinese embassy in Belgrade in May.
Earlier, Chinese negotiators at the Ministry of Foreign Trade and Economic Cooperation said China is keen to enter WTO by the end of this year.
Profits
Meanwhile, both firms are coming off of a profitable first half, although CNPC's relatively stronger performance reflects the recent surge in crude oil prices for the company, which is weighted more heavily upstream than its rival.
CNPC earned a 4.08 billion yuan net profit in first half 1999, posting a profit in June alone of 1.28 billion yuan, up 46% from the prior month.
CNPC's first half profit accounts for 52% of the government's target of 7.8 billion yuan for the company for 1999.
The increased profit in June comes largely on the strength of a 7.3% hike in the price of domestic crude from May to 1,009 yuan/ton.
Meanwhile, the more downstream-leveraged Sinopec logged a net profit of 3.22 billion yuan in the first half, accounting for 43% of its annual target.
Sinopec's profit in June was 640 million yuan, down 2.4% from the previous month, with first half profit reaching 3.22 billion yuan against the government target of 7.551 billion yuan
