Top Asian oil refiner Sinopec Corp has warned first-half earnings could fall by more than half as soaring crude prices and state-set price caps pushed its refining business deep into the red.
Analysts estimate Sinopec's earnings fell around 80% in the January to June period, but expect an improvement in the second half after Beijing hiked prices for gasoline and other products.
Investors had largely factored in poor earnings and the company's Hong Kong-listed shares closed up 0.13% on Friday, but its Shanghai-listed shares jumped 7.6% thanks in part to falling oil prices.
State-run Sinopec and PetroChina have found themselves squeezed between skyrocketing crude prices, which hit a record $147 this month, and government-controlled prices for gasoline and diesel.
Compounding their woes, Chinese refiners operate under an obligation to continue supplying the world's largest oil market, after the United States regardless of losses incurred. On Friday, the firm said it pumped 2.4% more oil and refined 6.7% more crude in the first six months.
"It is obviously going to get a bit better in the second half of this year after the price hike," said Macquarie analyst David Johnson.
"But at the end of the day, it really has to get oil prices down to about $100 a barrel to put its refining business at break-even, if the government tax rebate carries on."
He cut his earnings forecast for Sinopec by 60% to 26.6bn yuan for full-year 2008.
"The company has taken various measures to guarantee the supply for the refined oil market in China, which resulted in great losses in the oil-refinery business and a massive decline in overall performance in the first half-year," Sinopec said in a statement to the Hong Kong stock exchange.
Government-owned refiners are incurring losses even after Beijing raised prices for major refined oil products by nearly 20% on 20 June, in the first such move in months, but analysts hope the move will help companies in the second half.
TAX REBATE
To help the refiners, Beijing also introduced a tax rebate in April on crude imports, refunding three-quarters of the 17% value-added tax on imported oil.
Analysts say Sinopec could get 20bn yuan to 25bn yuan in each quarter from the rebate.
Two of Sinopec's units – Shanghai Petrochemical Co and Yizheng Chemical Fibre Co – also estimated on Thursday they made first-half net losses.
Sinopec's net profit in the first half of 2007 stood at 34.925bn yuan ($5.1bn) in accordance with Chinese accounting standards, it said.
It posted a nearly 70% fall in first-quarter earnings to 6.06bn yuan.
On Friday, Sinopec said it pumped 2.43% more oil in the first half of this year and refined 6.73% more crude.
That put China's No. 2 oil producer on track to beat a target of racking up 2.2% growth in oil production, but lagged a target for an 11.8% rise in crude throughput in the whole of 2008.
Shares of Shanghai Petrochemical were flat on Friday, but Yizheng shares fell 3.6%, lagging a 0.6% gain on the index of Chinese companies listed in Hong Kong.
Shares of Sinopec have fallen by more than 36% this year.
By Judy Hua, Reuters
