Sinopec’s Modest Profit Rise Amid Industry Challenges and Economic Headwinds in China

Sinopec, formally known as China Petroleum and Chemical Corp., reported a slight profit increase in the first half of the year despite facing significant challenges from a slowing Chinese economy and steep declines in its core fuel processing and sales businesses. The company’s net income rose by 1.7% year-on-year to $5 billion, while revenue dipped by 1.1% to $220 billion, according to its earnings release on Sunday.

Sinopec’s operating profit revealed a more nuanced picture of the difficulties confronting China’s largest oil refiner. The company’s exploration and production segment experienced a 15% increase, driven by stronger international crude prices and higher output. However, these gains were overshadowed by significant declines in other areas: oil processing dropped by 38%, and marketing and distribution fell by 14%. Diesel sales, particularly weak due to a slump in construction activity, highlighted the challenges.

The company’s chemicals division remained in negative territory, though losses narrowed during the period. Crude refining, one of China’s most troubled industries, saw accumulated losses of $2.2 billion in the first half of the year, according to the national statistics bureau. Rising prices and increased transport costs, exacerbated by conflict in the Red Sea, have weighed heavily on the sector.

Sinopec’s struggles are also tied to broader, long-term trends in the energy market. The shift toward electric vehicles and gas-powered trucks is reducing demand for gasoline, which constitutes about a quarter of China’s domestic oil consumption. Additionally, the ongoing property crisis in China has led to a drop in diesel demand, while capacity expansions in a slowing economy have resulted in a surplus of petrochemicals.

Compared to its state-owned peers, Sinopec is more vulnerable to fluctuations in China’s industrial and retail consumption due to its extensive refining operations. This contrasts with its upstream-focused rivals, PetroChina and Cnooc Ltd., which are expected to release their earnings later this week.

Sinopec’s stock gained up to 2% in Hong Kong following its earnings announcement, which met market expectations. The company expressed cautious optimism about the second half of the year, anticipating improvements in China’s economy and growth in demand for natural gas and chemicals. According to Chief Financial Officer Shou Donghua, Sinopec plans to maintain oil processing and product sales at similar levels to the first half, with a strategic shift toward more gasoline and jet fuel as transport fuel demand rebounds.

Additionally, Senior Vice President Wan Tao committed to reversing losses in the chemicals sector by focusing on product adjustments and cost control measures.

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