Review of Petroleum and Chemical Industry in H1

By Feng Shiliang of CPCIA

1. Economic functioning of the petroleum and chemical industry
in H1

    (1) Rapid production growth

With the completion of the new units and expanded units in 2006,
the petroleum and chemical production in China has maintained
a relatively rapid growth. According to the statistics from
China Petroleum and Chemical Industry Association (CPCIA), the
petroleum and chemical industry accomplished a total industrial
output value of RMB1 999.63 billion (present price) in the first
six months of 2006, an increase of 31.2% over the same period
of 2005, a main-business revenue of RMB1 950.07 billion, an
increase of 31.8% and a profit of RMB219.9 billion, an increase
of 28.2%.
   In terms of the output of major products, in 65 petroleum and
chemical products with priority tracking, 61 products had an
output increase from January to June 2006, accounting for 95.4%
and 48 of them had a growth of over 10%, accounting for 73.8%.
The output of natural gas, chemical fertilizers, pesticides,
basic chemical raw materials and synthetic resins increased
rapidly. Only the output of polypropylene fiber, kerosene, fuel
oils and photographic film rolls had some reduction compared
with the same period of 2005. The reduction margin in the output
of photographic film rolls was the highest, reaching 83.5%.

    (2) Stable sales and rising market price

The national economy in China is at the stage of heavy
industrialization. The consumption of energies and raw
materials is increasing rapidly. In the first half of 2006, the
demand of petroleum and chemical products in the economic
development continued to increase rapidly. Statistics showed
that the sales rate of petroleum and chemical products in China
was 98.05% from January to June 2006, a slight drop of 0.5
percentage points from the same period of 2005. The sales output
value in the oil/gas recovery sector was RMB331.64 billion, an
increase of 40.8%. The sales output value in the oil refining
sector was RMB624.82 billion, an increase of 33.9%. The sales
output value in the chemical sector was RMB981.08 billion, an
increase of 27.5%.
   Judging from the overall market price trend in the first half
of 2006, the overall cost increase and the sustained demand
growth gave strong support to the market, but the rapid capacity
expansion of some products led to an output increase and
mitigated the price rise pressure to some extent. The market
price of petroleum and chemical products therefore had ups and
downs side by side. There were frequent price fluctuations with
an overall reduction in the first quarter. The price was stable
with some pickup in the second quarter. In 156 chemical products
with priority tracking, 97 products had a price rise in June 2006
over May 2006 and 54 products had a price drop, accounting
respectively for 62.2% and 34.6% and 14 products maintained an
equal price, accounting for 9.0%. Nevertheless, the price was
still at a relatively low level compared with the same period
of 2005. In these 156 chemical products, the prices of 77
products dropped and only 61 products had a price rise,
accounting respectively for 49.4% and 39.1%.

    (3) Brisk import and export trade

With the firm support from the brisk international trade and the
favorable domestic market, the import and export trade of the
petroleum and chemical industry in China increase drastically
in 2006. The petroleum and chemical industry accomplished a
total import and export value of US$117.14 billion from January
to June 2006, an increase of 21.8% over the same period of 2005.
The import value was US$86.52 billion, an increase of 25.2%, the
export value was US$30.63 billion, an increase of 13.2% and the
unfavorable balance was US$55.89 billion, an increase of 32.9%.
The import amount of crude oil was 73.336 million tons from
January to June 2006, an increase of 15.4%. Due to the sustained
high oil price in the international market, the import value of
crude oil reached US$33.20 billion, an increase of 53.2%.

    (4) Uneven economic performance distribution

The petroleum and chemical industry accomplished a profit of
RMB219.9 billion in the first six months of 2006, an increase
of 28.2% over the same period of 2005. The overall profit grew
drastically mainly due to the development of the oil/gas
recovery sector. Owing to the drastic price rise of crude oil
and the price upward readjustment of natural gas, the profit
reaped in the oil/gas recovery sector reached RMB198.12 billion,
an increase of 48.9% and accounting for more than 90% of the total
profit in the petroleum and chemical industry. In the oil
refining sector, however, as the cost had an unduly rapid
increase and the price of oil products failed to rise
synchronously, losses built up month by month. The total loss
reached RMB28.4 billion from January to June 2006. As the sales
of petroleum and chemical products recovered gradually in the
second quarter, the profit reaped in the chemical sector reached
RMB49.15 billion from January to June 2006, an increase of 17.6%.

2. Major problems in economic functioning

     (1) Tense supply of oil products

The market of oil products in China, especially in southern
regions, had a tense supply in the first half of 2006. The import
amount of crude oil reached 73.336 million tons in the first six
months of 2006, an increase of 15.4% over the same period of 2005.
The situation was somewhat improved compared with the first
quarter, but as crude oil holds a strategic position in the
national economy great attention should be paid to its
development trend. China made two price readjustments to oil
products respectively in March and May 2006. Price readjustments
helped increase the utilization rate of energies and restrict
some consumption requirements, but the overall tense supply
would have no great changes.

    (2) Unduly high price of natural rubber

Natural rubber is a main raw material in the rubber industry.
China seriously lacks natural rubber resources. The supply
deficit is becoming more and more prominent and the price has
kept at a high level. According to the program made by the
Ministry of Agriculture, the total output of natural rubber in
China will be only 750 thousand tons in 2010 and the
self-sufficiency rate of domestic natural rubber will be less
than one-third. There will therefore be heavy dependence on
import and China will have to accept the price of natural rubber
offered by others. The price of natural rubber in China has
increased constantly in 2006 and the average price reached RMB25
250 per ton in June 2006, an increase of 3.1% over the same period
of 2005. The price rise of natural rubber has produced a huge
cost pressure to the rubber product sector. Downstream users
demand a price drop of natural rubber. The market has once again
focused on the import tariff of natural rubber. Producers have
requested the government to reduce the import tariff of natural
rubber or restore the tentative tariff rate of 12% before the
WTO accession.

    (3) Surplus capacity of some products

As the economic performance in the chemical sector has upgraded
in recent years, there is an upsurge of capacity expansion. Areas
with abundant energies and resources in cen