Issue Date: July 26, 2004
FROM RAGS TO RICHES IN CHINA
Along with the Middle East, China is where the action is in the petrochemical industry these days. Conglomerates, like China Petroleum & Chemical Corp. (Sinopec) and PetroChina, will spend billions of dollars in coming years to build large new plants that will pump products into the fast-growing Chinese market. Unfortunately for international bankers, Chinese companies will look no further than their own bank accounts to find the money they need for these large projects.
Not long ago, prospects for the Chinese petrochemical industry's ability to raise cash were bleak. In 1998, China Petrochemical Corp.--the parent company of Sinopec--declared a major loss on its operations. The same year--as a financial crisis hit Asia, Russia, and South America--Sinopec and other Chinese oil and petrochemical companies were forced to postpone plans to list themselves on international markets to raise funds.
What a difference a few years make. These days, Sinopec is not only profitable, it generates more cash from its operations than it spends on building and expanding new plants. "Basically, we do not feel any pressure for funding,"according to Jia Yiqun, Sinopec's Hong Kong-based manager of investor relations.
Moreover, Sinopec and other Chinese oil and petrochemical companies have raised billions of dollars since 2000 from domestic and international investors. China Petrochemical eventually spun off Sinopec onto the international market in the autumn of 2000. China National Petroleum spun off PetroChina in the spring of the same year.
China's appetite for petrochemical products is ferocious. In its recently released study, "Petrochemical Industry in China 2004," Dia Research Martech predicts that China's ethylene production capacity will grow from 4.6 million metric tons in 2000 to 7.7 million in 2005 and to 11.4 million in 2008. China will by then surpass Japan as Asia's largest olefin producer. But demand will grow even faster. Dia Martech forecasts that Chinese demand for ethylene will grow from 11 million metric tons in 2000 to 17.5 million in 2005 and 20 million in 2008.
DEVELOPMENTS in other sectors of the country's chemical industry are similarly impressive. Dia Martech expects China's polyester production capacity to grow to 9 million metric tons in 2006, up from 2.6 million metric tons in 1995. Production capacity of the basic building block methanol will likely reach 7 million metric tons in 2006, seven times the amount of 15 years ago.
Chinese companies do not depend on funding from foreign oil and petrochemical firms. Besides the well-publicized joint ventures that Sinopec and China National Offshore Oil Corp. have formed with BASF, BP, and Shell, many Chinese petrochemical producers are expanding on their own. Dia Martech notes that most expansion projects are taking place in the east and southeast of China, not the northeast where most heavy industry is traditionally based.
At Sinopec, China's largest oil and petrochemical conglomerate, the capital expenditure budget is directly linked to how much cash the company's operations are generating. It has been the bane of the petrochemical industry worldwide to over-invest when times are good, but the risk appears limited in China given the rapid increase in demand. Throughout Asia, the rationale for new petrochemical projects is China. Jia maintains that Sinopec subsidiaries such as Shanghai Petrochemical are also in a solid financial situation and are able to fund their expansion from cash flow.
Jia understands that a company can theoretically raise its profitability by borrowing from banks instead of using money that ultimately belongs to shareholders. But, he says, Sinopec prefers not to borrow. "If we plan a wonderful project and the timing is good to borrow from the market by issuing bonds or other instruments, we will do so in order to increase the wealth of our investors," he says. "Generally speaking, though, industrial companies like us are conservative." He notes that Sinopec is proud that it has steadily reduced the amount of debt it carries.
Before the current cyclical upturn in the global oil and petrochemical business, Sinopec raised nearly $4 billion with an initial public offering in Hong Kong and New York. Last year, Jia says, Sinopec returned to the market to raise an additional $420 million with a 15-year bond issue to Chinese investors to help pay for building a crude oil pipeline linking Shanghai, Nanjing, and Ningbo.
Foreign bankers who still think they can get a piece of the action in China's petrochemical industry are in for a tough fight with Chinese banks. Chinese petrochemical companies are flush with cash, and "if they want to get something done, they can get something done," says a Hong Kong-based banker who arranges financial packages for oil and petrochemical companies in Asia.
In the off-chance that, despite their strong balance sheets, Chinese petrochemical companies decided to turn to bank borrowings, they would likely go to Chinese banks. Liquid in both Chinese currency and U.S. dollars, Chinese banks can offer better terms and lower rates, says the Hong Kong executive. Furthermore, he believes that, nowadays, foreign companies implementing oil and petrochemical projects in China can get better loan terms from Chinese banks. "Foreign banks are getting crowded out; they're not competitive, even in U.S. dollars," he says. *
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