A merger of Sinochem Group and China National Chemical Corp would create a new oil-refining challenger to established state-run behemoths that dominate the country’s fuel-making business.
The prospective tie-up, combining two companies with assets of more than $100bn, would create the largest oil refiner behind China Petrochemical Corp and China National Petroleum Corp, according to data from Wood Mackenzie Ltd. The move signals a new strategy by policymakers to boost competition rather than weaken the dominant state-run companies by spinning off assets, according to Nevyn Nah, a Singapore-based analyst with Energy Aspects Ltd.
“The Chinese authorities are serious about weakening the stranglehold that Sinopec and PetroChina have on the oil sector,” Nah said, using the names of the publicly listed companies. “For the longest time, they’ve been talking about breaking this up, but now they’re actually talking about mergers, which is going against the grain of the earlier strategy.”
CNPC’s listed PetroChina Co in Hong Kong closed 0.8% higher on Friday, while China Petroleum & Chemical Corp, known as Sinopec, gained 1.1%. No one answered two calls to their respective press offices on Friday. The city’s benchmark Hang Seng Index rose 0.9%.
In response to Bloomberg’s story about the merger plan, representatives from ChemChina and Sinochem said on Friday that “there is no such thing.”
China’s energy-sector reforms had focused on the exploration, refining and distribution dominance of Sinopec Group and CNPC. The government had looked at stripping them of their oil and gas pipelines, accounting for some 90% of the nation’s network, to allow access to all producers and distributors, Bloomberg reported in May 2015. In June this year, CNPC decided to invest in expanding its pipeline network, suggesting that China was reorienting its efforts – a case bolstered the following month when President Xi Jinping advocated making state-owned enterprises “bigger, better and stronger.”
The government has sought to liberalise the energy sector at home while also creating national champions that can better compete globally. China has also encouraged the development of smaller independent refiners, known as teapots. They’ve been allowed since last year to buy and import their own crude oil and now account for about 30% of the country’s total capacity. “This is probably part of the government’s energy reform to consolidate smaller players and put them head-to-head with the bigger state refiners” like PetroChina and Sinopec, said Suresh Sivanandam, a senior manager of refining research at Wood Mackenzie Ltd in Singapore.
The combined company would have about 50mn tonnes of annual capacity, equivalent to about 1mn barrels a day, according to Wood Mackenzie Ltd That compares with 300mn tonnes annually for Sinopec, and 195mn for PetroChina.
ChemChina has crude supply deals with Russia’s Rosneft PJSC, while Sinochem has term contracts with Middle Eastern producers, according to Nah at Energy Aspects. “Chemchina, the biggest independent refiner in terms of system, and Sinochem, with all its import and export facilities, make them pretty strong together,” he said.
ChemChina is the country’s largest chemical company with nine refineries and more than 140,000 workers, according to its website. Sinochem, which has about 50,000 employees and assets worth about HK$301bn ($39bn) in businesses spanning oil fields in Brazil to rubber plantations in southeast Asia, owns China’s largest fertilizer company, as well as fluorine and seed companies.
China’s state-owned enterprises account for about 40 percent of the country’s industrial assets and 18% of total employment, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik. Consolidating and improving their profitability is critical for authorities to rebalance the $10tn economy away from debt-fuelled infrastructure investment and exports to one powered more by services and consumer spending.