Sinopec May Extend Refining Losses Unless Oil Falls

China Petroleum & Chemical Corp., Asia's biggest refiner, may extend losses from processing oil unless the cost for a barrel of the fuel falls below $64, two company officials said.

Domestic fuel prices have been kept below global levels by the government, causing refining losses for China Petroleum, one of the officials said in Shanghai on Aug. 31, asking not to be identified because of company policy.

Sinopec, as China Petroleum is known, have turned to losses since July, after making profits in the first half, as crude prices soared to records in August. China controls prices of diesel and gasoline to curb their impact on inflation, which climbed 5.6 percent in July, the highest in more than 10 years.

"Sinopec will continuously be pressured by crude costs as it's unlikely the government will raise fuel prices in the short term, given the nation's inflation rate," Zhang Guojun, an oil analyst with Pingan Securities Co., said by phone.

Benchmark oil prices in New York gained 10.4 percent in June and 11 percent in July. Prices have eased 6 percent since hitting a record of $78.77 a barrel on Aug. 1. Crude for October delivery rose by 0.24 percent to $74.23 a barrel in after-hours electronic trading on the New York Mercantile Exchange at 2:53 p.m. Beijing Time.

Stronger Yuan

The stronger yuan has helped domestic oil refiners offset higher crude costs. The Chinese currency has advanced 3.5 percent against the U.S. dollar this year amid speculation the government will tolerate further appreciation because of gains in the domestic stock market and the nation's strong economy.

The appreciation of the yuan and higher prices for naphtha and chemicals, raw materials for plastic carrier bags to synthetic fibers, have helped to increase the breakeven point for the refining business from $60 a barrel last year, said a second company official.

PetroChina Co., the nation's largest oil company, can make a profit from refining with crude at $65 a barrel, Zhang Hong, deputy chief economist of PetroChina Refinery & Marketing Co., said June 30.

Sinopec is "working" to get a government subsidy for selling fuels below international prices, President Wang Tianpu said Aug. 27. The company received a one-time 5 billion yuan subsidy at the end of last year to help cover raw material costs, after being handed 9.42 billion yuan a year earlier.

The refiner, which supplies about 80 percent of the fuel in the country, incurred losses from processing crude in July and August, Deputy Chief Financial Officer Liu Yun said Aug. 10.

Increased Prices

China increased gasoline and diesel prices twice last year to help refiners cope with rising raw material costs.

Sinopec shares fell 1.1 percent to HK$8.41 in Hong Kong at 2:55 p.m. The stock has risen 78 percent this year, outperforming PetroChina's 30 percent gain, and the benchmark Hang Seng Index's 36 percent increase.

First-half net income surged 66 percent to 36.2 billion yuan after it gained an operating profit of 5.49 billion yuan from refining during the period, compared with a loss of 16.6 billion yuan a year earlier, the company said Aug. 27.

The refiner expanded oil processing 6.4 percent, turning 2.91 million barrels of crude a day into fuels and chemicals in the first half to supply the world's fastest-growing major economy.

China is unlikely to raise fuel prices in the second half of this year because inflation is running above government targets, Rong Guangdao, chairman of Sinopec Shanghai Petrochemical Corp., a unit of Sinopec, said earlier this week.