Sinopec Shanghai Turns Around

Mar.29.10 | About: Sinopec Shanghai (SHI)

Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI), one of China’s largest petrochemical companies, recorded a net income of $206 million (RMB1.6 billion) or $2.85 (RMB 0.221) in 2009 as opposed to net losses of $804 million (RMB6.2 billion) or $11.15 (RMB0.866) in 2008. The earnings, however, missed the Zacks Consensus Estimate by $1.95 per share.

Sinopec Shanghai has benefited from the government's decision to ease controls, which prevented the company from passing on high crude oil costs to consumers.

Cost Control Helps Margins

In 2009, Shanghai’s crude oil costs amounted to $3,406 million (RMB2.6 billion), representing 58.76% of its total annual cost of sales. The average unit cost of crude oil processed was $389 per ton (RMB3,020.15 per ton), down 43.06% year over year.

Despite commencing operations at new plants in 2009, Shanghai curbed its energy bills by 2.62% from the energy-saving compliance indicator of 1.64 tons of standard coal per annum. Industrial water consumption was down 5.57% compared to the previous year; and industrial water recycling rate remained at above 95%.

Lower Selling Prices Pressure Revenues

In 2009, Shanghai’s net sales were down 20.20% year over year to $61 billion (RMB47.3 billion) reflecting 22.89%, 17.42%, 18.02% and 31.34% declines in net sales derived from synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products, respectively.

The decline in sales was primarily driven by lower selling prices. For the year, the average prices of the company’s synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products decreased 12.66%, 21.74%, 27.32% and 25.14%, respectively, from the previous year.

Production Update

Shanghai’s output-to-sales ratio and receivables recovery ratio were 99.62% and 99.52%, respectively. Shanghai processed 8,757,800 tons of crude oil, down 5.20% from the previous year. Production output of gasoline, diesel and jet fuel decreased 11.16% from the year-ago period.

Output of gasoline was 806,000 tons, up 4.28% year over year; output of diesel was 2,802,600 tons, down 18.02% from the previous year; and output of jet fuel was 679,000 tons, up 6.98% over the previous year.

Shanghai produced 927,700 tons of ethylene and 487,600 tons of propylene, up 4.75% and 0.06%, respectively, over the previous year. Production of synthetic resins and copolymers were up 9.13% year over year to 1,089,800 tons.

Production of synthetic fiber monomers (508,700 tons) and synthetic fiber polymers (599,700 tons) were up 10.13% and 2.42%, respectively, from last year levels. Synthetic fibers produced during 2009 (241,300 tons) was down 10.63% from the previous year.

Project Development

During 2009, Shanghai completed all its projects under the structural adjustment project (phase 5) involving a total investment of about $1 billion (RMB 8 billion). The company commenced operations at the new 600,000 ton per annum PX aromatics complex and the new 150,000 ton per annum C5 segregation plant as well as the flue gas desulphurization project for furnaces No. 3 and No. 4 of coal-fired power generating plants and the entire renovation project for the 220,000 volt substation commenced operation in June 2009.

The completion and operation of all the projects under the structural adjustment program should contribute to the company’s profitability in the long term.

Management Guidance

Shanghai foresees an improvement in the petrochemical market. The company expects China’s macroeconomic situation to remain positive in 2010 where GDP growth rate was 8.7% in 2009. The company expects demand for domestic petroleum and petrochemical products to stabilize in the near future.

However, the unabated upward trend of international crude oil prices as well as the newly added global production capacity for oil refining and ethylene which may lead to overcapacity and escalate competition are the near term headwinds for Shanghai.