Big Chinese Oil Firms Squeezed By High Crude Costs

HONG KONG –

China Petroleum & Chemical Corp. and PetroChina, the two largest oil firms in China, were under a cloud on Monday as U.S. crude oil futures climbed above $111 a barrel, directly endangering their profitability.

The crude oil future contract for April delivery rose to $111.80 a barrel in electronic trading on the New York Mercantile Exchange on Monday, the highest since 1983, before retreating to $111.26 in Hong Kong, up 1.1% from the last trading session. Crude rose because investors preferred holding commodities, particularly after the U.S dollar briefly fell below 96 yen and dropped to a record low of $1.5905 against the euro. This developed after the U.S. Federal Reserve abruptly cut the discount rate it charges commercial banks to 3.25% from 3.5% on Sunday night and assisted in a plan to salvage what remained of collapsing brokerage Bear Stearns.


Asia’s largest refiner, China Petroleum & Chemical Corp., commonly known as Sinopec, and PetroChina (nyse: PTR – news – people ), China’s biggest oil company, were hit the hardest by the record crude oil price, as the two giants, hamstrung by Beijing’s policy capping gasoline and diesel prices, were unable to shift any of their rising costs for imported crude onto consumers. H-shares of Sinopec sank 8.1%, or 54 Hong Kong cents (7 cents), to 6.14 Hong Kong dollars (79 cents), while PetroChina’s H-shares dropped 6.5%, or 66 Hong Kong cents (8 cents), to 9.42 Hong Kong cents ($1.21).

Research firm CLSA forecast that Sinopec would post an unprecedented loss of 40 billion yuan for the full year in 2008 if oil prices do not retreat in the second half. CLSA maintained its “sell” call on Sinopec since the Chinese government has apparently made Sinopec a sacrificial lamb on the altar of the country’s anti-inflation campaign. “Based on a $100 per barrel crude import cost, Sinopec could spook investors with a loss of 11 billion yuan ($1.5 billion) for the first quarter of this year. Such losses could continue to mount going into the second quarter,” Gordon Kwan, director of oil and gas research at CLSA Asia Pacific Markets, said in a note. “While we are forecasting losses only in the first half this year, if the oil price continues to hover at current levels, Sinopec could be at risk of posting an unprecedented loss for the full year,” he continued.

Forbes