China Petroleum and Chemical Corp (Sinopec), the country's second-largest oil and gas producer, Tuesday showed its eagerness for domestic fuel prices to be linked with the international market.

Asia's biggest oil refiner saw the profit margin of its refining business being squeezed by the widening gap between international crude oil prices and China's retail gasoline prices.

"We hope to see the price of refining products catch up with the international price," Wang Jiming, vice-chairman of Sinopec, said Tuesday.

The high crude oil prices should be delivered in the downstream refining products, according to Wang.

Market watchers are concerned that the profit margin of Sinopec's oil-refining operation is expected to face continued pressure, as China's fuel prices are not flexible.

The State-controlled company reported its full year refining margin tumbled to US$3.86 per barrel, which has been squeezed down 5.62 percent from US$4.09 per barrel in 2003, bolstered by rising oil prices.

"The crude oil price is expected to fluctuate at a high level in the first half of this year," Chairman Chen Tonghai said.

"But the rigid environment can urge us to further strengthen our internal efficiency and lower our costs."

Chen admitted the company's refining profit margins have been dampened by the fixed fuel pricesystem but believed the margin will not be too low this year.

The oil refiner reported its refining capacity of 2.7 million barrels a day last year, and expected its refining margin will probably stay between US$3.86 per barrel and US$3.9 per barrel during the first half of this year.

In China, wholesale gasoline and diesel prices are still decided by the government in order to curb inflation, making the refining product market rigid in response to soaring oil prices.

Oil market specialists generally worry that crude oil prices, which increased 34 percent last year to touch a record high of US$57.6 per barrel in March, will further eat into the company's earnings growth this year.

"International oil prices will continue to fluctuate at a high level till the third quarter as the global demand and supply is not that stable at all," said Sun Hung Kai Research strategist Caster Pang, suggesting the company's earnings growth will slow down to 30 percent this year.

He expected the crude oil will float at above US$50 per barrel during the first half of this year, bringing higher production cost for Sinopec in its downstream business.

Analysts expected the company will come up with ways to either reduce its operating costs or become more efficient if it wants the refining business to thrive.

"This year the profit growth of Sinopec will slow down as the refining unit is still under pressure from fuel prices," Phillip Securities director Louis Wong said.

The Beijing-based oil refiner posted its 2004 annual results on Monday, with net profit soaring 61 percent to 36.02 billion yuan (US$4.4 billion), broadly in line with market expectations of 35.62 billion yuan (US$4.3 billion yuan).

Its chemical division was the most outstanding performer, with its operating profits rising 4.3 times to 18.7 billion yuan (US$2.25 billion), while the exploration and production division recording a 34 percent jump to 25.6 billion yuan (US$3.1 billion).

Sinopec proposed a final dividend of 0.08 yuan per share, bringing its total dividend to 0.12 yuan per share, compared to 0.09 yuan a year earlier.

The company intends to reduce its workforce by 15,000 to 370,000 by the end of 2005 to improve cost-control and management efficiency.

With plans to spend 62 billion yuan (US$7.9 billion) this year, Sinopec vows to increase its crude throughputs from 36.3 million tons last year to 39 million tons in 2005.

It also plans to produce 6.07 billion cubic meters of natural gas this year, up from 3.9 billion cubic meters last year.

(China Daily March 30, 2005)