China’s Sinopec Shanghai Petrochemical sees Q1 margins hit by crude quality changes


Shanghai — Hong Kong-listed refiner Shanghai Petrochemical Co expects its first quarter 2019 refining margins to be impacted by narrowing light-heavy differentials as its preferred medium and heavy crudes become more costly, company executives said Wednesday at its earnings conference in Shanghai.

The outlook highlights a growing problem for Asian refiners, which are wrestling with the shift in the global crude slate to lighter and sweeter crudes.

The Brent/Dubai Exchange for Swaps dropped to under 30 cents/b in early March and has remained under $1/b for the past two months, according to S&P Global Platts data.

The “unreasonable” narrowing differential between light and heavy crudes has affected refining margins for the January-March quarter as heavier crudes are less competitive than they used to be, chief financial officer Zhou Meiyun said.

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“We realized the differential has been narrowing since October 2018 and have adjusted our crude purchasing plan in order to optimize for better economics,” Zhou said, adding that Sinopec Shanghai is able to crack a wide range of crudes.

The global crude slate has been gradually shifting due to the US shale boom, curbs on and geopolitical issues that have reduced output by Iran and Venezuela.

“Taken together, average crude compositions change rapidly from 2015 to roughly 2020-22 with higher API gravities, lower sulfur levels, higher naphtha content and less heavy reside content in crude,” according to S&P Global Platts Analytics.

This has pushed up prices for Middle Eastern grades and Asian refiners designed to process heavier crudes cannot switch to lighter grades overnight.

“We can process crudes with API up to 35,” company chairman Wu Haijun said on the sidelines, adding that the refiner had no plans to configure its facilities to process crudes lighter than 35 API so far.

In the long term, the light-heavy differential will return to its normal range as the refiner’s purchasing plan will be optimized, Wu said during the briefing.

He attributed the narrow differential to strong buying for heavier crudes from new refiners, which pushed up prices for heavier grades. Shanghai Petrochemical is state-owned Sinopec’s only listed refining and petrochemical subsidiary.


Shanghai Petrochemical’s profit after tax fell to Yuan 5.34 billion ($798 million) for the year ended December 31, 2018 from Yuan 6.15 billion in 2017 due to higher crude costs, despite annual net sales rising to Yuan 95.61 billion from Yuan 79.22 billion in 2017, Wu said.

The integrated refiner said its crude unit processing cost surged 31.3% year on year to $68.75/b in 2018, while the operating profit margin for refined products fell to 6.7% from 9.63% in 2017.

However, the crude purchasing cost was still about $1.12/b lower than Sinopec’s average level, Zhou said.

Shanghai Petrochemical processed 14.38 million mt of in 2018, of which 83.22% was from the and 14.52% from . The remaining 2.3% comprised 153,000 mt of US and 76,000 mt of European crudes, according to a company report.

It plans to raise throughput by 4.66% to 15.05 million mt in 2019, as no maintenance is planned this year.

“We are open to US crudes, but [purchases] will depend on its competitiveness and the status of -US tensions,” Wu said.

REFINED PRODUCTS Shanghai Petrochemical plans to raise its oil product yield to 62.19% in 2019 from 58.61% in 2018 for gasoil, gasoline and jet fuel and exceed the 2.12 million mt of products exported last year, most of which was gasoil and jet fuel.

The refiner was the first Sinopec subsidiary to produce low sulfur and supply it to bonded storage for trial runs in late January.

But producing low sulfur bunker fuel is not currently economic and the company was trying to lower costs further, Wu said, without committing to a production target for either LSFO or marine gasoil to comply with the IMO 2020 low sulfur regulations.

A company source said a 6,000 mt LSFO cargo was sold at around $383.19/mt for trial, which was lower than Platts’ assessment at $415/mt for 3.5% sulfur 380 CST for delivery in Shanghai the same day.

— Oceana Zhou,

— Edited by Wendy Wells,

Source: S&P Global Platts