Date
11 December 2017

Sinopec warning suggests more reforms in pipeline

China Petroleum and Chemical Corp (Sinopec, 00386.HK) chairman Fu Chengyu {傅成玉} has warned that the oil refinery sector could be replicating the fate of the Chinese steel industry.

In a speech delivered at the Chinese People’s Political Consultative Conference Thursday, Fu sounded a fresh alarm call for the industry that has been struggling with overcapacity in recent years. The average refinery utilization rate in China was about 67 percent last year, while the corresponding figure in the steel industry is 72-75 percent, Fu noted. 

“The refinery industry tomorrow could become like today’s steel sector,” business news website Yicai.com quoted him as saying.

Fu said the excess-capacity of the refinery industry has been underestimated so far.

Refinery capacity could reach 740 million tons in 2015, and will further climb to 910 million tons by 2020. On top of those, over a hundred smaller refineries are expected to have another 100 million tons of output, he said. 

Not only is there too much capacity, some of the existing facilities are also obsolete.

In a bid to combat the air pollution problem, the Chinese government has been paying more attention to the specifications of oil products and is taking steps to upgrade product quality. 

In line with the efforts, authorities implemented the No.4 emission standards for gasoline nationwide since the start of this year. But Fu said roughly 20 percent of the refineries are still failing to meet the standard.

The picture is the same with regard to petrochemical products, whose prices have been slipping in the past few years.

Given this situation, market reforms are the only way forward, Fu said. “There was no such thing as flexibility in wages and employment in the past,” he said, adding that it can only be achieved “through marketization”, which will ultimately help in enhancing the enterprise value.

Sinopec announced last month plans to bring private capital into the group. Fu’s latest comments suggest that the move marks just the first step on a long reforms path.

– Contact the writer at [email protected]

RC

EJ Insight writer

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