Sinopec gears up for WTO

Sinopec Corp (China Petroleum and Chemical Corporation), China's second largest integrated oil company, announced its results on August 27. The company, which last year carried out an initial public offering in Hong Kong, New York and London, saw its interim net profits for the six months ending June 30 this year rise to RMB9.58 billion ($1.15 billion), an increase of 27.51% over the same period last year.

FA: What do you think of the latest results?

Li: I think they are pretty healthy, although we clearly benefited from higher oil prices. However, the results also reflect the company's increase in turnover, which was mainly due to the company's expansion of its oil and natural gas production. Our expansion in oil production meant we managed to capitalize on higher international oil prices. It also helped our results, since turnover and other operating revenues of the company increased 10% over the same period last year to RMB164.3 billon.

FA: How is the company gearing up ahead of WTO?

Li: The impact of WTO will be on several levels, ranging from the macro level, right down to the level of the company itself. One of the most important aspects will be oil prices, which have been very volatile for the last couple of years. For example, at the beginning of 1999, international crude oil prices fell to $10 per barrel at their lowest point, but then reached a high of $35 around the third and fourth quarters of last year. Regardless, Sinopec is an integrated oil company with downstream as well as upstream operations, so we can maintain overall profitability, whatever the trend of oil prices. In addition, we used RMB6.4 billion from our share offer to acquire the (oil production company)  National Star to help increase our oil production and storage capacity.

FA: How will the reduction in import tariffs affect Sinopec?

Li: Tariffs will come down, but that will actually benefit us. We currently have to pay a tariff of RM16 on every ton of oil we import, but this will fall to zero after we join WTO. Sinopec actually imports 53% of its crude oil. Crude oil is our most important raw material, which we then transform into refined oil products and petrochemicals. But we are expanding our processing capacity, and hence our imports of crude oil, so when the RM16 tariff is abolished, it means cost savings for us. We can use these savings to make our products more price-competitive.

There is also a tariff on refined oil products. The tariff on gas is currently 9% and this will drop to 6% after WTO entry. Diesel is now 6% and will not change after WTO entry. Tariffs on chemical fertilizer will stay unchanged. The current tariff on petrochemical products is 16-18%, but will be cut to 6.5% after WTO, but only gradually over eight years. In the first year after WTO, the tariff will go down to 11%.

In addition, we will be helped by the government's policy decision, which became valid in 1998, to reduce imports of petrol and diesel. This will benefit us, as we intend to expand our processing capacity of crude oil to increase our production of these products.

FA: Tariffs aside, what other measures are you taking to prepare the company for WTO?

Li: WTO entry is also closely linked to the retail and wholesale markets. According to my understanding, the retail market will be liberalized within three years of WTO entry, and foreign companies will be able to open up gas stations. After five years, the wholesale market will be opened, and foreign companies will for, example, be able to build oil storage and docking facilities.

To respond to this challenge, Sinopec has been investing considerable sums of money in purchasing gas stations. Until recently, Chinese oil companies neglected the retail side in favour of the wholesale side. For example, in 1998 there were 86,000 gas stations in China, but Sinopec owned only 8,000, while PetroChina had had some 4,000, together making up only 14% of the market. Foreign companies have made it no secret that they intend to snap up as many of these gas stations as possible after WTO, so we have not been lying idle. By last year, we had 20,259 gas stations, while we have a special arrangement with another 5,234 gas stations, who can sell Sinopec products according to strict quality guidelines, although we do not own them.

FA: Are you concerned about foreign competition after WTO?

Li: We believe the post-WTO environment will be a win-win situation for foreign companies as well as for Chinese companies. We are not adopting an excessivley defensive posture. Sinopec has the advantage that its core markets are in those areas of the country where overall economic growth has been strongest, that is the north, east and south of the country, and in particular along the 19 coastal provinces.

In addition, foreign companies will have no choice but to go through Sinopec in order to access the Chinese market. When it comes to docking and storage investments, which are considerable, foreign companies will most likely look to use Sinopec's.

On the retail side, we are setting up joint ventures with three of the world's biggest oil companies by opening 500 joint venture gas stations with each of them. Consequently, we are are confident about our prospects after WTO.