China oil trading secrets illuminated by Sinochem Energy’s IPO plans

The planned initial public offering of Sinochem Energy Co has shined a light on the opaque world of China’s state-owned oil traders, which have risen to play a key role in global energy flows.Sinochem Energy, which describes itself as China’s leading oil and petroleum products trading company, disclosed that it handles about 2.7mn barrels a day, according to a 571-page document filed on Monday to the Hong Kong stock exchange. That effectively puts it in the same neighbourhood as some of the world’s largest independent merchants, such as Mercuria Energy Group and Gunvor Group.

“Sinochem is one of China’s oldest oil traders, and is seen as No 4 after the big three majors,” said Li Li, a Shanghai-based commodities researcher at ICIS-China. “It has groomed a group of competent oil traders, who moved on to reputable foreign trading houses, and is seen as the West Point for Chinese oil traders,” she said, referring to the elite US military academy.
Details gleaned from the filing by a unit of Sinochem Group may offer insights on the operations of other Chinese state traders, such as Unipec, Chinaoil and Zhenhua Oil. Shrouded in relative secrecy in the past, these companies are gaining prominence among the global oil community as China has raced past the US to become the world’s largest crude importer. At the same time, Beijing is taking steps to open the country’s heavily regulated energy market.

Pedestrian’s walk past the Sinochem Corp building in Beijing (file). The planned initial public offering of Sinochem Energy has shined a light on the opaque world of China’s state-owned oil traders, which have risen to play a key role in global energy flows.

“Sinochem has clearly identified the transformation that needs to take place in China’s energy sector,” Steve Jenkins, vice president for consulting at Wood Mackenzie, said by e-mail. “Building on its historic strengths in crude oil and products trading and storage, the company has increasingly been looking at forays further downstream.” Sinochem Energy’s IPO comes amid an expected merger between its parent and China National Chemical Corp, known as ChemChina. Sinochem Energy isn’t as large as rivals Chinaoil, the trading arm of PetroChina Co, or Unipec, which trades for China Petroleum & Chemical Corp, known as Sinopec. But unlike those houses, which operate within vast integrated companies with operations spanning oil drilling and refining, Sinochem Energy’s bread and butter is trading, which contributed 80% to the company’s revenue last year, according to its filing.

The domination of state trading companies within China may be waning, though. That’s mainly because of government policies that allow more companies to import foreign oil and export refined products, Sinochem Energy said in its prospectus. Sinochem began trading oil in the 1950s and enjoyed a monopoly for 40 years in the domestic market. In 1993, with energy imports rising very rapidly, Beijing opened the market to several major oil companies, leading to the creation of powerful state-owned trading houses that soon overtook it. Sinochem Energy mostly deals with crude oil, handling about 2.5mn barrels a day last year, and about 210,000 barrels daily of refined products. It has supply contracts with Kuwait, Iraq, Saudi Arabia, Oman, Angola and Equatorial Guinea.

About 65% of its oil comes from the Middle East and a quarter from West Africa. South America is also a major supplier. The prospectus also reveals how interconnected Chinese oil traders may be.Sinochem Energy’s biggest suppliers and customers are mostly state-owned petroleum companies, it said. These include firms linked to Chinaoil, Unipec and China National Offshore Oil Corp. In terms of payments, Sinochem Energy said it negotiates various terms with different customers. For most of them, especially those with a good credit record and who have a long and stable relationship with the company, it typically grants a credit term of up to 30 days upon delivery. It also uses multiple financial instruments to manage its exposure to volatility.

The company has storage space for about 37.4mn barrels worth of crude, refined product and petrochemicals, the largest commercial cache in China. The facilities are in the Yangtze River delta, Pearl River delta and Bohai Bay areas.

Sources and photo-credits: Bloomberg, Gulf Times