SHANGHAI (Interfax-China) -- The high price of oil is the Chinese petroleum and chemical industry's biggest problem, in addition to over investment and a low number of purchases, the China Petroleum and Chemical Industry Association (CPCIA) said in a report released on Tuesday in Beijing.
According to the report, high oil prices have diminished profit margins. Furthermore, an overabundance of investment, a common phenomenon in China, has caused overcapacity. Meanwhile, too few purchases has led to oversupply.
The report also said that some coal chemical projects can take advantage of these problems to be more competitive.
Some analysts expressed different opinions about the chemical industry's profitability in regards to high oil prices.
Shi Xuesong, a chemical industry analyst with China International Capital Corp., told Interfax that domestic demand for chemical products will be strong in 2008 because of rapid economic development. Downstream petrochemical companies, except for refining companies, can transfer the pressure of high costs to consumers.
But Liu Yanwei, a senior engineer with the China National Petroleum & Chemical Planning Institute, said that some chemical projects, which are fed with oil and gas, will experience additional pressure because of production costs.
"Because of rapid economic growth, the chemical industry will indeed have a large potential and will develop rapidly in coming years," Liu said. "However, the industry's profit margin will go down because of higher production costs."
According to the CPCIA report, China's petroleum and chemical industry's profits for 2007 will reach RMB 500 billion ($67.67 billion), up 20% year-on-year.
Liu said that most of the profits go to the upstream sector of the industry. Some Purified Tetrathalyc Acid (PTA) projects, a part of the downstream sector, have even suspended production recently because of high oil prices, he said.
Liu also said that the rise of chemical product prices do not match increases in production costs, so some downstream companies have had to lower the workload of their projects or carry out maintenance on production facilities, a common practice that forces the closure of facilities when it is unprofitable to operate them.
Liu said that natural gas prices are also very high for industrial users.
The National Development and Reform Commission (NDRC) released a notice in September limiting natural gas utilization in ammonia production and banning new natural gas-based methanol projects, with the intent of giving priority to city gas utilization. "Even if there was no such notice, natural gas prices are already too high to bring companies sufficient profits anyway," Liu said.
Liu agreed with the CPCIA report that coal chemical projects will have an opportunity to become more competitive if oil prices stay at such a high level.
"Coal prices are also increasing, but they will not skyrocket like oil prices. In addition, some alternative energy products, including methanol and dimethyl ether, which are produced from coal, will also have a promising future, since they will have lower production costs compared to gasoline and diesel," he said.
© Interfax-China 2007. For more intelligence on Chinese metals and mining, contact David Harman in Hong Kong at david.harman@interfax-news.com or (852) 2537-2262.
