Sinopec Jul12.pngSinopec is China’s main company in refining and chemical markets. Although it is listed on world stock markets, the government remains its largest shareholder with a 76% stake. As such, it follows government priorities rather than western commercial logic.

The chart above, from the blog’s major new study of the company, highlights some of the key issues. Between 1998 – 2011, Sinopec has:

• Spent a total of RMB 181bn (~$27bn) in chemicals capex (blue columns)
• Earned just RMB 110bn at EBIT level (Earnings Before Interest and Tax)

No western company would dream of spending this amount of capital for such poor returns.

But Sinopec operates as an arm of the government. Its role is effectively to act as a utility, ensuring reliable supplies of raw materials to the factories, to help maximise employment. For example, on ethylene it has:

• Inreased production by 14% per year over the period, from 2MT in 2000 to 10MT in 2011
• Normally run on a continuous basis (green columns), ignoring market downturns, at average operating rates of 102% over the same period

Thus it has enabled its downstream customers to maintain unbroken production schedules, and helped to ensure their reputation as reliable suppliers to global markets.

As discussed last November, Sinopec is thus an excellent example of our argument that economic factors are becoming less important in the global economy. Instead, social and political factors are beginning to dominate.