Big squeeze hits Chinese oil giant PetroChina

Even last year, when PetroChina’s market value briefly topped $1 trillion by some calculations trouble was brewing. While other global oil giants are reporting record profits, Chinese government price controls prevent PetroChina and other domestic refiners from passing on higher costs for crude oil to consumers. So their refining operations are bearing heavy losses, despite billions of dollars in subsidies.

On Monday, Asia’s biggest refiner, China Petroleum & Chemical Corp., or Sinopec, reported a 77% plunge in net profit, to 8.3 billion yuan ($1.2 billion), in the January-June half-year. That compared with 37.8 billion yuan in net profit a year ago. The precipitous decline came despite 33.4 billion yuan ($4.9 billion) in subsidies in the H1 of the year, Sinopec said. In the Q1, PetroChina reported that net profit plunged 31.5% to 28.8 billion yuan. First-half results are expected Wednesday.

Qiu Xiaofeng, a petroleum analyst at China Merchants Securities in Shanghai, estimates that PetroChina will report 48.5 billion yuan ($7 billion) in net profit for the H1, down about 40% from 81.8 billion yuan in January-June 2007. “Chinese refiners are unable to match gains from the high price of crude oil in international markets due to controls on retail prices,” Qiu said.

Qiu is among analysts forecasting that, now that the Olympics have finished, Beijing will move to raise retail fuel prices in coming weeks to at least partly reflect rising costs for Chinese refiners, following increases of up to 18% in June. “They should take advantage of this opportunity to adjust retail prices,” he said.

Yet, other policy moves could also either help, or hurt. PetroChina was valued, according to some calculations, at over $1 trillion following its mammoth share offering in Shanghai last October, making it the world’s most expensive company by market capitalization, though not the most profitable. But its share price has since sunk along with the benchmark Shanghai Composite Index, which at Monday’s close of 2,413.37 was down 61% from the all-time peak reached on Oct. 16, 2007.

PetroChina gained 0.9% to 13.61 yuan on Monday, compared with its trading debut peak of nearly 44 yuan. It remains the biggest component in the Shanghai Composite Index, but its market capitalization has dropped to about $360 billion, including shares traded in mainland China, Hong Kong and New York, Qiu said. (The Economic Times)