Intense cost and margins pressure arising from soaring crude prices has been exacerbated by government controlled prices of oil products such as diesel and gasoline which were artifically kept below market levels, the company sources and local traders added.

The government subsidises Sinopec's crude imports but these were insufficent to alleviate margin pressure arising from selling gasoline and diesel at below costs, the sources added.

"Naphtha is currently priced above yuan (CNY) 6,000/tonne ($840/tonne) but gasoline and diesel prices are respectively controlled below CNY5,500/tonne. This means the bread is costing less than the flour," one of the company sources said.

The producer is hoping to ease its cost pressure by exporting VAT-free polyolefins and it was widely speculated that new government incentives pertaining to Sinopec's proposal would be announced at the end of the year, a third local trader said.

Some local traders expect Sinopec to first sell its material to export-oriented processors in the country, who currently form the main customer base of foreign suppliers, if given a waiver.

The export-oriented processors currently prefer to import resins as they are not required to pay VAT and import duties on imported products, but are obligated to pay a 12% VAT on locally produced resins after a 5% VAT rebate, the traders said.

Sinopec's commodity grade yarn grade polyropylene (PP) currently priced at CNY11,600-11,750/tonne ex-factory would yield an export value of about CNY10,065-10,193/tonne ($1,416-1,434/tonne) FOB (free-on-board) China , if the VAT was waived, a second local trader estimated.

Based on an estimated Shanghai-southeast Asia 20-foot container freight rate of around $67/tonne as a basis, and CNY150/tonne factory-to-port delivery costs, the FOB China value would yield a CFR (cost and freight) southeast Asia price of $1,483-1,501/tonne, the second local trader said.

He noted that this price would be competitive in southeast Asia, one of the export markets likely to be targeted by the Chinese producer.

Based on the same ex-factory prices and freight rate but without a full VAT waiver, Chinese produced yarn grade PP would be above $1,600/tonne CFR southeast Asia. Chinese polyolefins exports are subject to a 5% VAT rebate under the existing policy.

Asian and Middle East yarn grade PP was selling at $1,510-1,530/tonne CFR in the week ended 7 March, according to global chemical market intelligence service ICIS pricing.

China polyolefins exports are expected to rise by leaps and bounds if Sinopec is granted a VAT waiver for its exports, and an influx of Chinese exports could weigh down on international polyolefins prices, as had been the case in other commdity sectors such as polyvinyl chloride (PVC), the company sources and local traders said.

Chinese polyolefins exports had registered an average annual growth rate of 47% for polyethylene (PE) and 32% for PP from 2001 to 2006, a Sinopec analyst said. 

Its high density PE (HDPE) exports grew by a staggering 89% last year to 37,946 tonnes compared to the previous year, with over 3,000 tonnes sold to the United Arab Emirates , more than 2,000 tonnes each shipped to Turkey , India and Vietnam , according to China customs data.

 More than 1,000 tonnes each were sold to Kenya , South Africa , Belgium , Spain , Israel , Malaysia and Indonesia , according to the data.

China's homogeneous grade PP exports grew by 18% last year to 31,128 tonnes with over 2,000 tonnes sold to Japan, and more than 1,000 tonnes each to India, Indonesia, South Korea, Thailand and Russia, the data showed.

($1 = CNY7.10)