Opportunities and Challenges Faced by China’s Private Petroleum and Chemical Enterprises
Jan 19,2019
At the end of last month, the 2014 China Petroleum and Chemical Industry Private Enterprise Development Conference was held in Beijing. With nearly 400 companies participating, this conference can be described as a grand gathering for private enterprises in the petroleum and chemical industries. It has been three years since the last development conference, which was held in 2011. So, over the past three years, what achievements have China’s private petroleum and chemical enterprises made? And what opportunities and challenges lie ahead for their future development? Over the years, remarkable progress has been made. Since the start of the 12th Five-Year Plan, with the continuous improvement of the market economic system, the private sector in the petroleum and chemical industries has shown a steady and positive development trend, and its share in the overall industry economy has been steadily increasing.
At the end of last month, the 2014 China Petroleum and Chemical Industry Private Enterprise Development Conference was held in Beijing. With nearly 400 companies participating, this conference can be described as a grand gathering for private enterprises in the petroleum and chemical industries. It has been three years since the last development conference, which was held in 2011. So, over the past three years, what achievements have China’s private petroleum and chemical enterprises made? And what are the opportunities and challenges they face in their future development?
Remarkable achievements over many years of development
Since the 12th Five-Year Plan, with the continuous improvement of the market economic system, the private sector in the petroleum and chemical industries has shown a steady and positive development trend, and its share in the overall industry economy has been steadily increasing. According to data from the China Petroleum and Chemical Industry Federation, in 2011, the total output value of the non-state-owned sector in the industry reached 5.65 trillion yuan, representing a year-on-year increase of 34.9% and accounting for 50.11%—the first time in history that this share has exceeded half. By the end of 2013, the number of non-state-owned enterprises in the industry had grown to 25,946, an increase of 5.9% over the previous year, accounting for 90.6% of the entire industry. Total assets amounted to 5.1 trillion yuan, up 18.5% year-on-year, representing 48.4% of the industry’s total assets. Main business revenue reached 7.55 trillion yuan, up 15.1% year-on-year, accounting for 56.7% of the industry’s total main business revenue. The total profit and tax amounted to 0.73 trillion yuan, up 14.1% year-on-year, accounting for 41.2% of the industry’s total profit and tax.
Over the past three years, private enterprises in the petroleum and chemical industries have adapted to the new economic environment, accelerated the pace of industrial restructuring, continuously expanded their scale, steadily optimized their structure, and gradually enhanced their competitiveness. Their key highlights are primarily reflected in the following aspects.
First, the scale of enterprises has expanded rapidly. Since the 12th Five-Year Plan period, despite the slowdown in macroeconomic growth, private enterprises in the oil and chemical industries have continued to maintain steady growth, with their overall size steadily increasing. From 2012 to 2013, the asset growth rates of the non-public sector were 26.7% and 18.5%, respectively, while the growth rates of main business revenue were 21% and 15.1%, respectively. Both asset and revenue growth rates exceeded the average levels of enterprises above a designated size in the industry during the same period. For three consecutive years, the share of main business revenue from the non-public sector has exceeded half of the total. According to survey data released last year by the Small and Medium-sized Enterprises Working Committee of the China Petroleum and Chemical Industry Federation, covering 186 private enterprises, from 2010 to 2012, the average growth rates of total assets and sales revenue reached 28.16% and 27.23%, respectively—higher than the average growth rates of enterprises above a designated size in the industry during the same period.
Second, economic benefits continue to improve. Over the past three years, private enterprises in the petroleum and chemical industries have maintained relatively strong economic performance. From 2012 to 2013, the total profit growth rates of these enterprises were 7.7% and 14.3%, respectively—higher than the average profit growth rate for large-scale enterprises across the entire industry. Among the 186 private enterprises surveyed in the industry, the average growth rate of total profits was 15.3%, demonstrating the robust growth potential of private petrochemical enterprises during the period of economic structural adjustment and enterprise transformation and upgrading.
Third, significant progress has been made in transformation and upgrading. In line with national industrial policies and the requirements for sustainable enterprise development, private enterprises in the petroleum and chemical industries have stepped up efforts to restructure their operations and focus on transformation and upgrading, achieving remarkable improvements in areas such as process technology and equipment, management sophistication, employees’ job skills, and overall enterprise competitiveness. Taking the comprehensive indicator—total-factor labor productivity—as a measure of the effectiveness of transformation and upgrading, in 2011 and 2012, the growth rate of total-factor labor productivity in the non-state-owned sector of the industry reached 14.75%, exceeding the industry-wide average growth rate of 8%. Among the private enterprises surveyed, the average growth rate of total-factor labor productivity reached 16.77%, surpassing the growth rate of large-scale enterprises in the same industry during the same period.
Reform sparks endogenous momentum.
In his report at the conference, Li Yongwu, President of the China Petroleum and Chemical Industry Federation, emphasized that at present and in the coming period, the industry’s development landscape remains complex and multifaceted, with both favorable conditions and unfavorable factors coexisting. Therefore, private enterprises should seize the opportunities presented by deepening reform and accelerate their transformation and upgrading.
From an international perspective, the global oil and chemical industries are accelerating a new round of structural adjustments. First, the diversification of feedstock sources is gaining momentum. Major breakthroughs have been made in shale gas development, and positive progress has been achieved in the research and development of emerging energy sources such as biomass energy, profoundly impacting the global energy and industrial landscape. Second, the focus of development is shifting rapidly toward emerging fields such as new chemical materials, high-end specialty chemicals, and bio-based chemicals. Many multinational corporations are actively adjusting their growth strategies, decisively divesting from traditional businesses, and seizing future competitive advantages through mergers and acquisitions, restructuring, and resource integration. Third, green and low-carbon development has become the mainstream model, and circular economy, clean production, and energy-saving and environmentally friendly industries are thriving.
From a domestic perspective, the fundamental trend of China’s economy—its long-term healthy development—has not changed. China’s economic growth rate remains among the highest in the world, and the processes of industrialization, informatization, urbanization, and agricultural modernization are steadily advancing. With enormous domestic market potential, this creates a long-term and stable demand for petroleum and chemical products. In particular, the Third Plenary Session of the 18th CPC Central Committee made comprehensive arrangements for deepening reform in an all-round way, clearly stating that economic system reform is the focal point of comprehensively deepening reform, with the core goal being to enable the market to play a decisive role in resource allocation. As various reform measures are rolled out one after another, institutional and mechanistic barriers that have been constraining economic development will be effectively removed, and the endogenous driving forces and market vitality of the economy will be fully unleashed. This presents new historical opportunities for the transformation and upgrading of the petroleum and chemical industries, especially for private enterprises.
So, what opportunities do private enterprises have in the development of various industries? Gu Zongqin, director of the Institute for Petroleum and Chemical Planning, believes the key lies in three main areas.
First, in 2013, China’s dependence on foreign crude oil reached 58.1%. It is projected that by 2020, consumption will exceed 500 million tons, and the country’s reliance on foreign sources will surpass 60%. Therefore, the refining industry presents development opportunities for private enterprises. As the market plays a decisive role in resource allocation, import sources of crude oil will gradually be liberalized in the future, enabling private refining companies to transform their current situation.
Second, in recent years, China’s ethylene production capacity has been steadily increasing; however, the domestic self-sufficiency rate of ethylene, measured in terms of equivalent consumption, remains below 50%. In 2012, China’s equivalent ethylene consumption totaled approximately 31.9 million tons, with a self-sufficiency rate of only 47.5%, leaving substantial room for market growth. Looking at natural gas production and consumption, it is projected that natural gas consumption in 2013 will reach 117.6 billion cubic meters, of which 53 billion cubic meters will be imported, resulting in an apparent consumption volume of 167.6 billion cubic meters—a growth rate of 13.9%. The country’s external dependence on natural gas stands at 31.6%. In recent years, China’s rapid economic growth has fueled strong demand for downstream propylene derivatives. Yet, domestic supply falls short of meeting this demand, necessitating large-scale imports each year of various propylene derivatives, including polypropylene, acrylonitrile, butanol and octanol, propylene oxide, and ethylene-propylene rubber. In 2012, China’s equivalent propylene consumption reached approximately 24.28 million tons, with a self-sufficiency rate of around 63%. In these sectors, private enterprises have ample opportunities for development.
Again, looking at the self-sufficiency rates in key areas of new chemical materials since 2012, engineering plastics stand at only 39%, specialty rubbers at 52%, high-performance fibers at 31%, bio-based new chemical materials at 96%, and functional membrane materials and components at 50%. All these sectors face a gap between supply and demand.
Wang Lei, Deputy General Manager of Beijing Aokeli Technology Development Co., Ltd., told a reporter from China Chemical Industry News that current national policies are relatively favorable to the development of private enterprises. As a result, many small and medium-sized private enterprises in the industry have begun to join forces and pool their resources to secure favorable policies. For example, thanks to the active efforts of Shandong’s independent refinery companies, the state has expressed its willingness to gradually increase refining quotas allocated to local regions. This indicates that private enterprises have promising opportunities for development in this area.
Deep-seated contradictions are gradually coming to the fore.
Li Yongwu pointed out that, while achieving certain accomplishments, the deep-seated contradictions and problems that have accumulated over a long period in China's petrochemical industry have become even more prominent.
First, the economic benefits are less than ideal. Although we reversed the downward trend in 2013, our profit growth rate still lagged behind the national industrial average by 6 percentage points. There is also a significant gap in cost management: in the chemical industry, the profit margin on main business revenue was 0.8 percentage points lower than the national industrial average; and the cost per 100 yuan of main business revenue was 1.7 yuan higher than the national industrial average.
Second, the contradiction of overcapacity is particularly prominent. While capacity for traditional products and certain generic products remains excessive, capacity for high-tech, high-value-added高端 products is significantly insufficient. As newly built projects gradually come on stream, the contradiction of overcapacity will only intensify further.
Third, the capacity for scientific and technological innovation remains relatively weak. Companies generally invest relatively little in R&D, and there is a shortage of talent specialized in technological innovation. A collaborative innovation system involving industry, academia, and research institutions—led by enterprises—has yet to be fully established. In particular, the capabilities for original innovation and the commercialization of scientific research findings remain weak, with a commercialization rate below 30%.
Fourth, the situation regarding safety and environmental protection is severe. A series of serious and particularly grave safety and environmental accidents that have occurred continuously in recent years have drawn widespread public attention. The industry ranks first among all sectors in terms of emissions of the three major industrial wastes, placing enormous pressure on pollution reduction efforts.
Wu Yuqi, Chairman of the Board of Directors of China National Petroleum Energy Group Corporation (Hong Kong), specifically analyzed that private chemical enterprises are facing enormous challenges and can be described as forging ahead amid storms.
On the one hand, the current slowdown in China’s economic growth and the decelerating pace of consumption are triggering a ripple effect, leading to reduced demand for materials and products across various industries. As pillar and foundational industries, the petroleum and chemical sectors are particularly affected: a decline in downstream product consumption will inevitably lead to lower demand for upstream raw materials. Wu Yuqi pointed out that this trend is clearly evident in the commencement of infrastructure projects. In previous years, many infrastructure construction projects would already have started shortly after the Spring Festival; however, this year, the rate of project starts has dropped by 50% compared to previous years, and numerous construction projects have been suspended altogether. Looking at individual provinces, the number of infrastructure projects commencing has significantly declined, resulting in reduced material consumption and a sharp drop in demand for petrochemical products. Moreover, China’s petrochemical industry—including all its sub-sectors—holds a substantial global market share, and many sectors are now experiencing overcapacity. This situation has created a stark contradiction with the ongoing decline in consumption.
On the other hand, rising labor costs have driven up costs across all industries. As costs in the logistics, service, and related supporting sectors increase, so too do costs in the petrochemical industry. The combination of higher costs and declining consumption is bound to lead to overcapacity. After a period of accumulating excess capacity, inventories in various industries will swell to enormous levels, making it unsustainable for businesses. The resulting rise in financial and other expenses will inevitably force companies to engage in competitive price cuts. With prices falling while costs continue to rise, the difficulties faced by private enterprises have already begun to surface at the start of this year.
Wang Lei also pointed out that currently, many chemical products suffer from overcapacity, and some enterprises are bound to fail in the competition. Moreover, an increasing number of foreign companies are gradually stepping up their penetration into the Chinese market; they enjoy clear technological advantages. Only by continuously innovating can enterprises better compete.
Zhang Xiaofei, General Manager of the Marketing Center at Kunming Jiahe Technology Co., Ltd., stated that for small and medium-sized private enterprises, the key challenge lies in the lack of technology. Currently, many companies acquire mid-to-high-end technologies and equipment from abroad, with very few engaging in independent R&D and production. Moreover, domestic private enterprises often lack the service-oriented mindset found in foreign companies. “I believe that while projects don’t come along every day, losses do occur daily,” Zhang Xiaofei said. “By providing services to offset these losses, small and medium-sized enterprises can significantly enhance their ability to withstand risks.”
Seize the opportunity and brave the storms.
Li Yongwu pointed out that the Decision adopted at the Third Plenary Session of the 18th CPC Central Committee clearly stated that we must unswervingly encourage, support, and guide the development of the non-public sector economy, thereby unleashing its vitality and creativity. This provides a clear direction for the future development of private enterprises and also creates a more favorable policy environment. Since the beginning of this year, many central enterprises—including PetroChina, Sinopec, and CNOOC—have launched mixed-ownership reforms one after another, allowing private capital to take stakes in their subsidiaries and construction projects. The shareholding ratios have also significantly increased compared to previous levels. This not only helps state-owned enterprises accelerate their market-oriented reforms but also promotes the sustainable development of non-public enterprises. Private enterprises must seize these opportunities and rise to the challenges.
Gu Zongqin suggested that in the refining sector, private enterprises could leverage the crude oil products from large-scale refining projects, subjecting them to further hydrogenation and refining to produce high-value-added petroleum products such as premium de-aromatized solvent oils, thereby achieving differentiated development from larger state-owned enterprises. Additionally, they could capitalize on by-products generated by these large-scale refining projects—such as propylene, liquefied petroleum gas, sulfur, and petroleum coke—to develop downstream extended products. Furthermore, they could provide supporting facilities and ancillary services tailored to the needs of these large-scale refining projects.
In the downstream sector of olefins, private enterprises also have development opportunities. In the future, there will continue to be a significant supply gap for olefin products. By 2020, it is projected that China’s self-sufficiency rates for ethylene and propylene equivalents will rise to 70% and 80%, respectively; however, a gap of several million tons will still remain.
In addition, as the feedstock routes for olefin production continue to diversify, private enterprises can find business opportunities in this trend. In recent years, both domestically and internationally, a variety of technologies for producing olefins from different feedstocks have been developed and put into practice, including MTO/MTP, CPP, Superflex, and ACO. During the 13th Five-Year Plan period, the state will encourage exploration of diversified olefin feedstocks, and private enterprises can actively participate in this development.
In the coal chemical industry, private enterprises with strong control over coal resources can collaborate with major domestic and international oil companies, natural gas companies, and petrochemical firms to develop large-scale, cutting-edge coal-to-gas, coal-to-oil, and coal-to-olefins projects.
For the many existing private enterprises in traditional coal chemical industries—such as methanol, calcium carbide, and coke—on the one hand, they can leverage advanced technologies to upgrade their existing production lines and maintain their competitive edge in the industry. On the other hand, they can explore opportunities to extend downstream and develop new products, thereby promoting the transformation and upgrading of their product structures. At the same time, enterprises should closely monitor advancements in emerging coal chemical technologies, such as methanol-to-aromatics (MTA) and new carbonyl synthesis products.
Gu Zongqin also pointed out that the fine chemical sector in emerging fields will continue to be a key investment focus, and private enterprises should pay close attention to this area. In particular, functional coatings and waterborne coatings, new varieties of dyes and their chemical intermediates, green synthesis technologies, electronic chemicals, high-performance water treatment chemicals, functional food additives, high-performance environmentally friendly flame retardants, high-performance rubber additives, and environmentally friendly plastic additives have become the primary areas for the development and industrialization of fine chemical technologies. At the same time, enterprises should vigorously develop new products and new technologies in the field of biofine chemicals.
We’ve learned that several private enterprises have already begun to eye the opportunities mentioned above. Our company has long been engaged in oilfield chemicals and was awarded the Second Prize for National Scientific and Technological Progress in 2008. We hold more than 30 national patents. While continuing to excel in our current field, the company is also considering a strategic shift. First, we’re interested in entering the agricultural sector, focusing on the deep processing of fruit trees to enhance product added value. Second, we’re looking to expand overseas, with Iran being our top choice for breaking into foreign markets. As long as a company possesses the necessary technology and strength, it’s certain to open up overseas markets, said Wang Lei.
In addition, relevant government departments are working hard to create a fair environment that supports the innovation and development of private enterprises. Zheng Xin, Director of the Small and Medium-sized Enterprises Division of the Ministry of Industry and Information Technology (MIIT), stated that the MIIT will focus on the following key areas in the next phase: further implementing the "Opinions of the State Council on Further Supporting the Healthy Development of Small and Micro Enterprises" as a top priority and intensifying efforts to put these policies into practice; revising the "Law on Promoting Small and Medium-sized Enterprises" to further optimize the business environment for enterprise development; removing various hidden barriers to promote the healthy development of the non-public sector economy; advancing the deep integration of informatization and industrialization to foster innovation and development among SMEs; strengthening the construction of a network of public service platforms for SMEs to further enhance the service system; and improving financing services for private enterprises by fully implementing the guiding opinions on financial support for small and micro enterprises.
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