Local refineries wait and see

Diesel oil's price has fallen as low as 4000 yuan per ton. Local refineries are struggling to maintain profits, of even generating losses. As a result, some have pulled out of the market.

According to Wang Jun, local companies operate on a much smaller scale, and are weaker in facilities and technology. Their only option to maintain volumes is by undercutting PetroChina and Sinopec list prices by 100 yuan per ton. "In that case, the more we sell the more we lose. So we have ceased operations while we wait for the situation to change."

Information from CBI China indicates that the mothballed plants have an annual capacity of 24.6 million tons, but they will be operating at a rate of only 4.3 million tons by the end of this month.

Just as these local Shandong refineries were suspending production, PetroChina and Sinopec launched two joint price increments respectively on March 13 and March 20, boosting the domestic diesel oil price up by 50-100 yuan (US$7.32 – 14.64) per ton. As of March 24, the average wholesale price of diesel oil had climbed to 4436 yuan (US$649.49) per ton.

With regard to the price rise, Wang Jun went on to predict that most local refineries will not blindly resume production, since he observes the price may fall again at any time considering the oil giants' stock situation. "However, if these local plants stay out of production long enough, they will simply disappear from the market. At that point, only PetroChina and Sinopec will be left with a smile on their faces."

From winter to spring: oil giants

The recent steep climb in the international crude oil price has shifted public attention on to the two national oil companies, whose annual reports of 2008 will be published shortly.

Normura Securities' latest research report claims that PetroChina's (SH.601857, HK0857, NYSE.PTR) 2008 results will disappoint the public. "PetroChina is expected to report a 24.7% drop in profits in 2008, to 109.6 billion yuan (US$16 billion).

Nomura thinks the Chinese government's price control strategy when the international price soared played a role in PetroChina's huge profit drop in 2008, in which refinery and sales reported a shortfall of 84.5 billion yuan (US$12 billion), and chemicals 3.2 billion yuan (US$468 million). Counting the 20 billion yuan (US$292 million) inventory impairment reserve, PetroChina's performance in 2008 was heavily undermined.

PetroChina published its annual report on March 26, four days ahead of Sinopec (SH.600028, HK.0386, NYSE. SNP).

On the evening of March 24, a source close to the top management of PetroChina clarified the situation: "There's no question that the company encountered major turbulence last year. But given that the company still appears fundamentally healthy and well-managed, the source was of the view that "the annual results are unlikely to affect the company's share price."

Meanwhile, China Merchants Securities Analyst Qiu Xiaofeng believes that during the first quarter of 2009 the two oil giant's refinery business has not only compensated for the previous losses, but will also act as a significant boost to the company's overall performance in Q1.