The “Inventory Movement†in the petrochemical industry continues to face excess capacity
The international crude oil price in 2008 experienced a dramatic rollercoaster ride. At the start of the year, the NYMEX oil price was as low as $86 per barrel, but by mid-July it surged to $147 per barrel—a staggering 71% increase. However, this upward trend was short-lived, as the global economic crisis soon sent prices plummeting. By the end of the year, the price had fallen below $50 per barrel, marking an almost 80% drop.
This volatility had a significant impact on the entire oil industry. In the second half of 2008, upstream producers, downstream refiners, and petrochemical companies all made substantial provisions for falling inventory values. He Wei, an analyst at Bank of China International, noted that the main challenge for the petrochemical sector this year would be demand shocks. The rapid expansion of production capacity in the previous year is expected to be gradually released this year, potentially leading to overcapacity in the industry.
Looking ahead, many analysts believe that crude oil prices will remain relatively low. Sinopec and PetroChina, two major Chinese energy companies, have shown different performance in the stock market. As of April 23, Sinopec’s share price rebounded by 37.89% since the beginning of the year, while PetroChina only managed a 13.96% increase. According to He Wei, this divergence reflects expectations about the direction of oil prices.
He Wei predicts that when international oil prices fall below $45 per barrel, Sinopec will outperform both PetroChina and CNOOC in terms of earnings per share. This is largely due to Sinopec's integrated upstream and downstream operations, which give it better resilience against oil price declines.
Bohai Securities analyst Zhang Yanming believes that factors supporting oil prices, such as liquidity, are gradually diminishing, but still remain strong. Crude oil prices are now finding a new range near $50 per barrel. If positive economic data emerge, prices could break higher. However, this scenario depends on improved economic conditions and a recovery in oil consumption.
He Wei also forecasts that crude oil demand in 2009 will remain weak, keeping prices at a relatively low level—below $70 per barrel. In response to weak demand, some oil giants may implement production cuts. Recently, OPEC proposed reducing daily oil supply by 4 million barrels to stabilize prices.
However, He Wei argues that many oil-producing countries have already invested heavily based on higher oil prices, such as $80 or more per barrel. With the sudden drop in prices, their revenues have declined sharply, making it difficult for them to maintain production cuts effectively.
While oil prices remain sluggish, the refining industry has become a favorite among investors. On December 18, 2008, the State Council issued a circular on refined oil pricing reforms, signaling a shift toward a more market-oriented approach. The Development and Reform Commission later announced a reduction in refined oil prices starting from December 19, 2008. Many see this as a landmark moment for the industry.
Overall, He Wei expects the refining industry to remain relatively stable this year.
On the other hand, the downstream petrochemical industry remains uncertain. Some analysts are optimistic, while others are pessimistic. Reports indicate that many A-share listed petrochemical companies are still reporting pre-revenue for the first quarter of 2009, with losses attributed mainly to weak demand rather than inventory write-downs from the previous year.
For example, Shanxi 3D projected a loss of about 85 million yuan in the first half of 2009, citing reduced market demand and lower product prices. Similarly, Shenyang Chemical reported a loss of 30 million yuan in the first quarter, blaming the financial crisis for shrinking demand and falling prices.
He Wei points out that the downstream chemical industry faces a dual challenge: weak demand and expanding supply, which together lead to overcapacity. The ethylene industry, for instance, is expected to see a surge in production capacity. New projects in China, including Fujian Refining and Tianjin Refining, are set to add 7.8 million tons of capacity between 2009 and 2010. Globally, the Middle East is also expected to add 14 million tons of ethylene capacity in the next two years, raising concerns about oversupply.
Despite these challenges, some analysts remain cautiously optimistic. Cing Dingkun from China Investment notes that while the petrochemical industry faced poor conditions in January and February, there were signs of recovery in March. Prices rebounded, output increased, and operating rates improved, leading to a rise in gross profit margins. Whether this trend continues depends on macroeconomic adjustments, but overall, the sector appears to be stabilizing.
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