Shanghai Petrochemical Co., Ltd.
Shanghai Petrochemical Co., Ltd.
(86) 21 794-1941
Fax: (86) 21 794-2267
Public Company (majority-owned by China National Petroleum Corp.)
Sales: RMB12.3 billion (US$1.5 billion) (1995)
Stock Exchanges: Hong Kong New York Shanghai
SICs: 2824 Organic Fibers, Noncellulosic; 2911 Petroleum Refining; 1321 Natural Gas Liquids
With more than 55 plants, Shanghai Petrochemical Co., Ltd. (SPC) is China’s largest and most diverse petrochemical enterprise, ranking among the country’s biggest corporations. By the early 1990s, the firm was China’s only petrochemical entity to combine petroleum, chemicals, chemical fibers, and plastics operations at one site. Its complex included: one ethylene plant, two chemical intermediates units, two polyester units, an aromatics plant, a poly vinyl alcohol plant, a polyacrylic fiber plant, and a plastics factory. SPC’s hundreds of petrochemical products have applications in many industries, including: agriculture, pharmaceutical, automotive, aviation, appliance, and textile. In 1996, the company set new production records, refining 4.85 million metric tons (mt) of crude oil (on a capacity of 5.3 million mt) into premium gasoline, diesel fuel, asphalt, and other petroleum products. The by-products of these processes were used to produce 465,000 mt of ethylene; 701,000 mt of synthetic fibers; and 344,000 mt of synthetic plastics. Asian Monetary Magazine named SPC China’s Best Managed Company that same year.
SPC’s size is not the only factor that sets it apart from the majority of Chinese companies. The firm’s development can serve as a study in the post-World War II modernization of industry and trade in the People’s Republic of China. SPC’s creation corresponded with the reopening of the country to foreign diplomacy. As China warmed to international relations—both diplomatic and economic—SPC evolved from a dependence on rather backwards domestic technology to a preference for purchasing advanced plant and process from foreign firms. With the government’s approval, the company eventually sought development loans from foreign banks. In 1993, this trend reached an important stage when SPC became one of a limited number of Chinese firms to have equity traded on international stock exchanges.
Background and Foundation in 1972
Like all major Chinese enterprises, Shanghai Petrochemical Company’s history is intimately linked to China’s communist government. In fact, the impetus behind the 1972 creation of this petrochemical company can be traced to the ascendance of political leaders Zhou Enlai and Deng Xiaoping in the waning years of Mao Zedong’s life.
In the early 1970s, the People’s Republic of China was beginning to emerge from a chaotic period known as the “Cultural Revolution” (1966–76), when Chairman Mao encouraged anti-intellectualism and isolationism while largely neglecting economic development. The social and political upheaval that resulted from this movement hampered the country’s budding industrial efforts, reducing overall industrial production by 12 percent from 1966 to 1968.
With the approval of Mao, who experienced a debilitating stroke in 1972, Zhou began a series of reforms, including the gradual reopening of international relations. After a 20-year hiatus of official Sino-American relations, he hosted a clandestine meeting with U.S. national security advisor Henry Kissinger in 1971, and supported President Richard Nixon’s historic visit the following year. This relaxation of tensions between the two nations was an important step toward opening the door to importations of the petrochemical processing equipment that was vital to the successful development of the Shanghai Petrochemical Complex.
SPC was organized in 1972 as a wholly-owned subsidiary of China National Petroleum Corp. (SINOPEC), the government-controlled arbiter of the nation’s petroleum industry. The plant was built on Hangzhou Bay in Jinshanwei, about two hours outside Shanghai. One of about a dozen “special economic zones” created in the late 1970s and early 1980s to draw international investment and trade, Shanghai would grow to become China’s premier industrial and manufacturing center. The first phase of SPC’s development lasted four years and cost the Chinese government an estimated US$800 million. Although the plant used some imported technology, most of its equipment and processes were developed domestically.
In 1978, after a period of political turmoil surrounding Mao’s and Zhou’s deaths in 1976, Deng Xiaoping and the Chinese Communist Party (CCP) formulated a rigorous ten-year plan for economic growth. This program placed utmost emphasis on “Four Modernizations”: industry, defense, agriculture, and science and technology. And in a dramatic reversal of previous policy, the country began to solicit capital from overseas sources to help finance these modernizations.
Basic chemicals, including petrochemicals, were among the highest priority industries, because they constituted the basic building blocks of many modern consumer goods. Petrochemicals are used in such widely varied products as drugs, fabrics, fertilizers, paints, and plastics of all types. As a result, SPC enjoyed a great deal of support from the government. For example, SINOPEC—which soon grew to rank among the world’s top five petroleum producers—sold crude oil to SPC at a 40 percent discount to world market prices.
But with such rewards came heavy responsibilities. In order for the Chinese government to maintain full employment, many of the nation’s largest firms were obliged to take on upwards of 50 percent more workers than necessary. Furthermore, they had no authority to use incentive or punishment to motivate workers. SPC also had heavy social obligations, including construction and maintenance of its own utilities (power and water plants) and transportation network (a wharf, railroad hub, and highways), not to mention primary and secondary schools and universities, hospitals, movie houses, and shopping centers. By the early 1990s, the complex employed over 60,000 and supported at least 40,000 more. For most of its history, SPC concentrated more on increasing its production levels and meeting its social obligations than making a profit. In fact, the company was compelled to forward any annual financial surplus to the government, which rationed out the funds according to national economic plans.
Economic Reforms Continue Apace in the 1980s
While China often fell short of its stated goals, it did make progress toward economic liberalization in the 1980s. Increasing openness to external influence was evidenced at SPC in the purchase of technology from companies outside the People’s Republic of China. In fact, the petrochemical company contracted most of the construction and purchased much of its equipment from foreign firms for its subsequent expansion programs. By the early 1990s, over 80 percent of its production facilities were based on imported technology. The Chinese government lent SPC the US$850 million needed to finance this program, which lasted from 1980 to 1985. The debts were paid by 1988.
In 1987, SPC embarked on a third stage of capacity expansion. This three-year program borrowed US$920 million from domestic sources and tapped international lenders for another $350 million. The subsequent addition of an imported 450,000 mt/year ethylene unit ranked SPC number one among China’s ethylene plants and pushed the nation into the world’s top ten ethylene producers. Ethylene is one of the organic chemical industry’s most important feedstocks. It can be polymerized to create polyethylene plastic for packaging; combined with sulfuric acid and hydrolyzed to make gasoline additives; or combined with oxygen to create an ingredient for antifreeze and soaps.
SPC had for most of its first two decades in business concentrated on meeting seemingly insatiable domestic petrochemical demand. The company took its first tentative step toward the export markets with the 1984 creation of Shanghai Jinshan Associated Trading Corp. (SJATC), an overseas trading office. Corporate export volume constituted less than 4 percent of annual sales by 1991, but the company had forged vital ties to customers in 20 different countries. These international contacts would become increasingly important as SPC sought joint venture partners in the early 1990s.
Internationalism Dominates 1990s
China accelerated its “economic liberalization program” in September 1992. With an eye on increasing efficiency and becoming more involved in the global economy, it gave company managers more authority to allocate resources, both human and material, and slowly began to ease wage, distribution, and price controls to correspond slightly more closely to market levels. Along with this freedom came increased accountability for fiscal performance.
As China’s domestic petrochemical industry grew close to meeting internal demand, petrochemical ministers began to turn their attention to international export and downstream diversification in the early 1990s. Joint ventures were key to SPC’s overseas strategy. Joint venture and patent laws adopted in the late 1970s helped reassure foreign entrepreneurs that their assets and ideas would not be stolen. Furthermore, China made efforts to reduce bureaucratic “red tape” and relax tax codes to entice outside investors. Realizing the largely untapped potential of the Chinese consumer market, the usually wary leaders of the global chemical industry snapped up joint venture opportunities. From 1993 to 1996, SPC signed cooperative agreements with at least nine foreign firms, including BP Chemicals, Phillips Petroleum Co., Mitsubishi Corp., and Union Carbide.
Economic liberalization also meant that the Chinese government was willing to sell minority stakes in some of its most capital-intensive businesses to reduce outright borrowing. But in order to make the shares attractive to bottom-line-minded investors, the companies had to “spin-off” their social welfare components as separate entities. Before SPC could make its mid-1993 flotation, it separated into Shanghai Petrochemical Company, Ltd., which got all the production units, and Jinshan Industrial, which oversaw other interests like schools and hospitals. SPC also had to adopt international accounting principles including stating its after-tax profit as opposed to the traditional standard of “tax plus profit.”
Having cleared these and other hurdles, SPC became one of China’s first and largest companies to make an initial public stock offering in July 1993, when the government sold 29.6 percent of its equity via H shares traded on the Hong Kong stock exchange and American Depository Receipts (ADRs) offered on the New York stock market. The H shares debuted at about HK$1.40, while each ADR represented 100 class H shares, and was initially priced at US$20.39 apiece. Seeking ground-floor equities in the so-called “market of one billion,” investors quickly oversubscribed the offering. SPC planned to use the proceeds to pay down about US$123 million in foreign debts and fund new capital projects.
Considerations for the 1990s and Beyond
SPC’s stock performed well in the mid-1990s, as its net income multiplied from RMB443.1 million in 1992 to over RMB2 billion by 1995. Far Eastern Economic Review’s Henny Sender warned that “[the stock] was blessed less by its own strength than by the fact that demand for China shares far exceeded supply” in those heady days.
Sender was by no means the only analyst to sound the alarm with regard to SPC and its securities. For notwithstanding the company and country’s admirable strides toward economic liberalism, several areas of concern remained. For example, although SPC was relieved of the majority of its social welfare responsibilities prior to its initial stock offering, it was still required to “allocate a portion of its profits to its public-welfare fund,” according to a July 1993 brief in the Far Eastern Economic Review. Furthermore, SPC’s reliance on SINOPEC for subsidized crude oil, which constituted over half of its production expenses, undermined its entire balance sheet. For while SPC proved profitable in the early 1990s, some of that prosperity was clearly due to the steep discount on crude it received from SINOPEC. Just as the government relaxed controls on the price of SPC’s products (a benefit), it could easily rescind its discounts on crude (a detriment). As the Far Eastern Economic Review’s Ivan Png and Changqui Wu pointed out in October 1995, “a company like Shanghai Petrochemical may be making millions of dollars without really succeeding in market terms.” Issues such as these must have weighed heavily on the minds of any SPC investor.
In 1995, Wu Yixin succeeded Wang Jiming, who moved on to the presidency of SINOPEC, as SPC President. Soon after taking office, Wu Yixin revealed that the company would require US$9.3 billion to pay for the next three years’ expansion programs. In light of the scarcity of government funds for these projects, SPC issued 500 million new H shares on the Hong Kong stock exchange to generate over RMB4 billion (about US$500 million) in mid-1996. The floatation reduced SINOPEC’s share of SPC to 64 percent. The capital investment program included capacity increases of both ethylene and synthetic fibers to 1 million t/y by 2005. By the year 2000, SPC forecast sales of RMB20 billion and income before taxes of RMB5 million.
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—April Dougal Gasbarre