Singapore—The much anticipated merger of Sinochem Group with ChemChina has paved the path to create an oil-to-chemicals giant that analysts said would give the companies flexibility to share oil trading and refining expertise to maximize margins in a competitive market, as well as boost the ability to produce more downstream products to support a fast-growing chemicals industry.
For the oil segment, some of the key benefits of the merger would be the sharing of retail outlets, oil product quotas, feedstock resources as well as refining expertise, analysts and trade sources said."The creation of larger players may help to phase out smaller units, and a merger like this will help to create a company that would be able to compete better and have a bigger influence on the domestic market," said Grace Lee, senior oil analyst for China at S&P Global Platts Analytics.
While it would take some time for the synergies to flow in, analysts said the merger of the two state-run companies would also widen the scope for the combined entity to expand its footprint beyond energy -- from tires to machinery equipment.
"The merger is more likely to help in ChemChina's oil trading and refining businesses as it would bring in Sinochem's expertise and resources," a Hong Kong-based analyst said, adding that crude buying and oil products selling would be the areas that would see early benefits.
In addition, Sinochem is expected to share its domestic oil products outlet with ChemChina's refineries, while more ChemChina barrels could be sold to the international market by using Sinochem's export quotas, analysts and trade sources added.
Green signalThe two state-owned companies, with a combined asset value of $245 billion, received the final approval for merger from China's Assets Supervision and Administration Commission on March 31 to start the consolidation process.
The merged entity would help expand in chemicals, biosciences, materials science, basic chemicals, environmental science, rubber and tires, machinery equipment, urban operations and industrial finance, according to a joint statement from the companies.
"It will take a long time for the giants to merge their key businesses first, their chemicals business and energy," a Beijing-based analyst said.
Sinochem Group is an integrated operator in the oil and chemicals industry, providing agricultural inputs -- seeds, agrochemicals and fertilizers -- and modern agricultural services. ChemChina operates in business sectors covering new chemical materials and specialty chemicals, agrochemicals, oil processing and refined products, tire and rubber products as well as chemical equipment.
Analysts said the merger with Sinochem is expected to lead to changes in ChemChina's oil business operations, but the impact is unlikely to be felt soon.
Assets and operationsIn the energy sector, Sinochem has 32 oil and gas upstream cooperation projects in nine countries, with about one billion barrels interest, the 15 million mt/year Quanzhou Petrochemical in southern China, 1,368 branded retail gas stations and 5.12 million cu m of domestic storage capacity, according to its company website.
It also has a robust oil trading team, a business which was established as early as in the 1950s.
Sinochem Energy has been attempting to list on China's A share market to finance expansion of its refining and storage operations after it started planning for an IPO in Hong Kong in mid 2018
It plans to list the company's crude and oil products trading, refinery, product sales and storage assets, but would exclude its upstream operations that will remain under its parent company Sinochem Group, it said in the prospectus.
In comparison, ChemChina was set up in 2004 and currently owns four operational refineries, with a total capacity of 22.2 million mt/year capacity. The capacity was expanded through the acquisition from the country's independent sector.
It also built up its trading desks and invested a 12% stake in Mercuria in 2016 in an effort to serve its refineries better and develop a trading business.
ChemChina has three major refineries in Shandong: the 7 million mt/year Huaxing Petrochemical, the 8 million mt/year Changyi Petrochemical, and the 5 million mt/year Zhenghe Petrochemical. It imported 17.33 million mt of crudes in 2020, up 19.8% from 14.46 million mt in 2019.
ESPO, Nemina and Murban were the top three crudes imported by ChemChina in 2020, which accounted for 35%, 16% and 11%, respectively. Brazil's Tupi, Buzios and Iracema, as well as Oman, closely followed, accounting for a combined 19% last year.
SinoChem is one of the seven oil product export quota holders in China.
In fourth quarter 2019, ChemChina's Shandong-based Changyi Petrochemical, Huaxing Petrochemical and Zhenghe Group exported gasoline cargoes through Sinochem. The outflow was suspended in 2020 due to weak overseas demand following the pandemic.
