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SINOPEC Shangai Petrochemical Company (SNP)Stock (Independent Oil & Gas Industry, Manufacturing Industry, Synthetics Industry, Energy Industry)
 Sinopec Shanghai Petrochemical Company Limited (NYSE: SNP), a subsidiary of Sinopec Corp., is one of the largest chemical-refining petrochemical companies in China. Sinopec is currently the biggest domestic ethylene and acrylic fiber producer, and the company also produces important refined oil products, intermediate petrochemicals, resins, and synthetic fibers, for a predominantly Chinese market. Although SPC has been partially privatized, the Chinese government, in addition to setting domestic petroleum prices, retains considerable influence over the company's management and provides SPC with subsidies. Although SPC has historically benefited from the Chinese government’s control of the market, the government set unfavorably low prices for SPC's products in 2006. These low prices, added to a sharp increase in crude oil prices, have been detrimental to SPC's profit margins. However, as China recently joined the World Trade Organization, it is likely that petrleum price controls will be lifted, leaving SPC to fend for itself in a free market. To prepare itself, SPC has taken initiatives to strengthen management and improve efficiency.
[edit] Company BackgroundSinopec Shanghai Petrochemical Company is one of the largest chemical-refining petrochemical companies in China, accounting for over 12% of China’s petrochemical industry in 2006. It is a vertically integrated company that mainly processes crude oil into synthetic fibers, resins, and plastics, as well as other intermediate petrochemical and petroleum products.  SPC is a subsidiary of the China Petrochemical & Chemical Corporation, which grew out of the Shanghai Petrochemical Complex in 1972. By the end of 2005, SPC had built up a primary crude oil processing capacity of 14,000,000 tons, an expansive utilities system, loading and unloading handling facilities on ocean and inland waterways, and railway and highway transportation. Considering that China is still a net importer of petrochemical products (especially high-end), there is considerable growth potential for domestic companies such as SPC. In July 1993, SPC became the first company incorporated under the laws of the People’s Republic of China (PRC) to make a global equity offering, and its shares were listed on the Shanghai Stock Exchange, the Hong Kong Stock Exchange, and the New York Stock Exchange. Despite the company’s public offering, the Chinese government maintains strong control over the company’s operations. Sinopec, SPC’s parent company, has indicated that SPC might become completely privatized. In the meantime, however, the government still has significant influence over the company’s operations. In the second quarter of 2008, Sinopec saw profits fall 87%, as rising oil prices, and the Chinese government's price ceilings on gasoline destroyed the company's margins.[1] [edit] Recent & Ongoing InitiativesAlthough SPC's net sales increased by 10.46% in 2006, its net profit fell 56.77% from the previous year, largely a result of the governmental price regulations imposed on the Chinese petrochemical market. Profit margins in the oil refining business decreased substantially; as a result, SPC is trying to compensate by streamlining its operations. Current initiatives include reforming its smaller, auxiliary businesses and improving efficiency by implementing a more centralized management structure. Additionally, SPC is striving to become more efficient with its resources. This means using the minimal amount of raw materials and energy necessary to distill and manufacture its products. Statistics show that indicators of efficiency, such as number of non-scheduled suspensions, have been improving as a result of these initiatives. SPC also plans to enter the high-end chemical market, where most of the demand is currently met by foreign companies. Sinopec recently entered into an agreement with the Iranian government to develop the Yadavaran oil field, thought to contain $12-18 billion worth of oil; the company was able to enter the agreement before competitors because the Chinese government is in great need of secure energy resources, and so has no problem with Iran's nuclear power initiatives, or with the country's demands to operate the company's production facilities. [edit] Products & MarketsAbout half of SPC’s sales come from petrochemicals, including intermediate petrochemicals, resins and plastics, and synthetic fibers. With the exception of petroleum products, SPC is a major competitor in every product market in which it participates. SPC is also currently the biggest domestic ethylene and acrylic fiber producer. SPC’s primary market is the People’s Republic of China (PRC). With the Chinese economy currently experiencing a period of rapid, large-scale industrialization, petrochemicals are in high demand. China's growth for the first three quarters of 2007, for example, was as high as 11.5%, contributing to Sinopec's year-on-year Q1-Q3 revenue growth of 13.62% and EBIT growth of 38.28%. SPC especially benefits from its proximity to the demanding Shanghai area, which reduces its transportation costs to the metropolis. Customers in Eastern China, one of the fastest growing regions in the PRC, account for most of SPC’s revenues. 
[edit] Trends and Forces In 2006, the global economy experienced strong growth, with significant industrial expansion in China. The economic growth in China was very beneficial to the petrochemical industry overall; a variety of other factors, however, affect this industry, and SPC, specifically. [edit] Crude Oil PricesIn the past years, crude oil prices have been one of the most significant determining factors of SPC's profitability. Last year, crude oil costs accounted for 67.7% of the company’s annual cost of sales. And because 2006 oil prices hiked to record highs (an average 17.84% increase for the year), SPC's net profits fell 56.77% from 2005. Despite the growing demand for petrochemicals, the higher prices forced SPC to process 6.03% less crude oil in 2006. Because almost all of SPC's crude oil is processed into petroleum products such as gasoline, diesel, and jet fuels, the total volume of these goods produced fell as well, though sales did increase over 10%. With so many of its products dependent of crude oil, higher oil prices can have a significant impact on SPC's bottom line. SPC does extract some of its own fuels, like crude oil and natural gas; the rising cost of extraction for oil has also been contributing to declining margins, though realized prices have been increasing because of the difficulty of extraction is coupling with increasing demand. Overall, the effects on the company have been negative; year-on-year Q1-Q3 extraction costs have risen 18.62%, contributing for segment EBIT falling 29.15%. [edit] Chinese GovernmentThe Chinese government affects SPC in a number of ways, including its control over prices, influence in SPC’s management, and its provision of both taxes and subsidies.
[edit] PrivatizationIn the past, SPC's parent company, China Petroleum & Chemical (SNP), has paid a premium 10%-15% over market price to buy out minority shareholders of some of its other former subsidiaries. SNP has said that it will use similar buyouts to further privatization, leading investors to drive up SPC's stock in anticipation of a buyout. SNP has released multiple statements in an attempt to dispel this speculation; these statements were largely ignored by investors, who continue to speculate about a buyout of SPC. If SNP does ever recommence buyouts, it would be beneficial for holders of SPC stock. However, existing hype may have already led to an overinflation of SPC's stock price. [edit] CompetitionSPC’s major competition comes from Sunoco (SUN), Valero Energy (VLO), and Sinopec Beijing Yanhua (also a subsidiary of Sinopec). Currently, SPC has managed competition well because of the government's price controls and its proximity to large customer bases. However, the expected future revocation of these price controls, and the increased competition that will ensue, could put heavy pricing pressure on SPC. Additionally, four large-scale ethylene units in Saudi Arabia and Kuwait are scheduled to begin operations by the second half of 2008; this could present additional competitive pressure for SPC as these units come online.
 SINOPEC Shangai Petrochemical Company2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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