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Sinopec's largest oil refinery, Zhenhai Refining & Chemicals Branch, reported significant losses yesterday, with total losses reaching 1.368 billion yuan in just two months due to soaring crude oil prices. This situation highlights a growing concern among refining companies: the more they process, the more they lose. According to Xiao Hui, an analyst at United Securities, the government is unlikely to allow resource product prices to rise in the short term in order to meet its annual CPI target of 4.8%. Instead, it is expected that subsidies will be provided to offset the losses incurred by refineries.
The phrase “if you make a ton of oil, you lose more than a thousand†has become a common saying among industry insiders. Zhenhai Refining & Chemicals, a wholly-owned subsidiary of Sinopec, is one of the largest domestic refining companies. Last year, it processed 18.61 million tons of crude oil, accounting for 12% of Sinopec’s total and 6% of the national total.
The massive loss at Zhenhai Refining & Chemicals is just the tip of the iceberg for Sinopec’s refining operations. According to a representative from Zhanjiang Dongxing Petroleum Enterprise Co., Ltd., international crude oil prices have now surpassed $100 per barrel. Most of the crude oil used by Sinopec’s refineries is imported at global prices, while domestic refined oil prices are subject to strict government control. As a result, the price of refined products remains significantly lower than the cost of imported crude, creating a situation where refiners face heavy losses.
To address this issue, the Ministry of Finance recently provided a subsidy of 12.3 billion yuan to China Petroleum & Chemical Corporation (Sinopec). Of this, 4.9 billion was included in 2007’s subsidy income, and 7.4 billion was allocated in the first quarter of this year.
According to the same source, when crude oil prices exceeded $70 per barrel in July last year, the National Development and Reform Commission raised the ex-factory prices of refined oil twice within a month, helping to alleviate some of the losses. However, with crude oil prices now exceeding $100 per barrel, the company is losing over 1,000 yuan per ton of oil.
Sinopec operates 29 major refining companies, including Yanshan Petrochemical, Shijiazhuang Refinery, Qilu Petrochemical, Guangzhou Petrochemical General Plant, and Zhanjiang Dongxing Petroleum Enterprise Co., Ltd. In 2006, these refineries processed a total of 157 million tons of crude oil.
Despite efforts to manage costs, the inverted relationship between crude oil and refined oil prices remains difficult to reverse in the short term. A representative from Sinopec explained that the company has implemented strategies to optimize crude oil purchases, such as focusing on high-quality, low-sulfur crude oils. At the same time, they are also purchasing heavier, high-sulfur crude oils to balance costs and improve long-term efficiency.
With the sharp rise in crude oil prices, Sinopec has adjusted its purchase and production plans, aiming to reduce costs by buying during dips and absorbing price fluctuations. Xiao Hui, an analyst at Sinopec’s petrochemicals division, noted that the current price inversion is unlikely to change soon. Given that February’s CPI reached 8.7%, the government is under pressure to keep inflation under control. Therefore, it is expected that resource product prices will remain tightly controlled in the near future.
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