The petrochemical industry is structured into three main segments: upstream, midstream, and downstream. At the top of the chain, crude oil and natural gas production serve as the primary sources. Midstream involves refining crude oil into various products such as gasoline, diesel, and naphtha, while the downstream segment includes chemical fiber, rubber, and plastic manufacturing. This article focuses on the upstream and midstream sectors, with a particular emphasis on two key chains: crude oil to refined oil, and naphtha to major intermediate products like ethylene, PVC, HDPE, LDPE, and PP.
**Crude Oil Is Fire, Refined Oil Is Ice**
In 2005, the refining operations of Sinopec, Shanghai Petrochemical, and Yangzi Petrochemical faced significant losses, with gross profit margins turning negative. In contrast, companies involved in crude oil extraction—such as China Petroleum, Liaohe Oilfield, and Daming Oil—experienced rapid profit growth, with gross margins reaching as high as 69%. According to annual reports and quarterly filings, Sinopec and Daming Oil saw their crude oil revenues increase by around 30%, reflecting strong performance in the upstream sector.
The profitability of crude oil and natural gas exploration is closely tied to international oil prices. As global crude prices rose, so did the profits from upstream operations, with many companies setting new records. However, the refining sector struggled due to rising input costs and limited ability to pass on price increases to consumers.
**Naphtha: The Struggles of Middlemen**
Since 2003, the petrochemical industry experienced a period of rapid growth, with product prices rising faster than the cost of key raw materials like naphtha. The peak of this cycle occurred in late 2004 and early 2005, after which the margin between raw material and finished product prices began to shrink. By the end of 2005, most petrochemical products had returned to historical average profit levels.
Despite this, naphtha prices continued to rise during the same period, squeezing profit margins for companies reliant on it. A review of Sinopec, Shanghai Petrochemical, and Yangzi Petrochemical’s financial data from 2004 to 2005 showed that while revenue increased, the rate of cost growth outpaced revenue gains, leading to a sharp drop in gross margins.
The price transmission mechanism in the downstream petrochemical supply chain is primarily driven by market forces. Rising crude oil and naphtha prices are inevitably passed down the chain to downstream products like ethylene, PVC, HDPE, LDPE, and PP. However, due to intense competition at the mid and lower levels of the industry, these companies often struggle to adjust product prices quickly, resulting in blocked price transmission. As a result, much of the cost burden falls on the downstream producers.
Although the gross profit margin of basic petrochemical intermediates has declined, it remains relatively high—above 20%—due to strong demand from downstream industries. During 2004–2005, the decline in gross margins for intermediate products was more pronounced than for downstream products. This was largely due to a sharp rise in petrochemical product prices in the first three quarters of 2004, which exceeded the increase in crude oil prices. The expansion of production capacity further intensified competition, leading to a faster erosion of profit margins.
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