Earnings of China's listed petrochemical firms recovered last year due to rising product prices, but high crude oil costs narrowed margins, according to analysts. They also say the sector faces difficulties in the long term, as China's pending membership in the World Trade Organization (WTO), expected this year, will bring a wave of foreign competition.
Improved domestic and world petrochemical markets last year led to a strong recovery by Chinese producers, said a China Securities analyst. Shanghai Petrochemical Co. reported a 155% surge in net profits in 1999 vs. 1998, while Jilin Chemical Industrial Group announced a 125% rise. Shanghai Chlor Alkali Chemical Co. Ltd. reported a net profit of 36 million yuan ($4.32 million) last year. Yizheng Chemical showed a net profit of 772 million yuan, bouncing back from a loss of 174.73 million yuan.
A rebound in petrochemical prices was the key to improved profits, analysts and company officials say. In 1998, China's petrochemical firms suffered as prices sagged due to weak demand during the Asian economic crisis.
Shanghai Chlor Alkali, which produces polyvinyl chloride and caustic soda, said it had racked up losses in the first 2 months of 1999, but the situation improved after that. The rise in prices of synthetic fibers, plastics, and oil products boosted Shanghai Petrochemical's performance, officials said. But high prices for crude oil, which accounted for nearly half of Shanghai Petrochemical's production costs, will continue to crimp profits this year, they predicted.
New competition drivers
A new competitive environment after China joins the WTO also looms on the horizon. China has pledged to cut import tariffs on petrochemicals, which will put mounting pressure on domestic companies.
China has been building a more market-oriented petrochemical industry in recent years, which puts pressure on producers, said a Yizheng Chemical official, who added that more competition is expected after China's WTO entry. But analysts say that Chinese producers have to expand if they want to compete with foreign industry giants.
Last month, PetroChina, a unit of China National Petroleum Corp., became the first of China's three major oil firms to list its stock overseas to raise much-needed capital. PetroChina has mostly traded below its initial price of $1.27 (H.K.) in Hong Kong since listing on Apr. 7. The weak debut has dampened the hopes of other aspirants, including China Petrochemical Corp. and China National Offshore Oil Corp.
