Minnows hope to break stranglehold of petrochemical giants


01 October 2007

Hepeng Jia/Beijing, China 

One day after the legislature passed China’s long-awaited anti-monopoly law on 30 August, Yu Yuanzhi joined 100 other private petrochemical dealers in Beijing. 

Here, at a seminar in the capital city, calls to break the monopoly on petroleum supplies held by two big State-owned oil giants - China National Petroleum Corp (CNPC) and Sinopec - were repeatedly applauded. 

High hopes for anti-monopoly law

Petrochemical monopolies have left smaller companies without oil


Yu, the president of Shenyang-based private oil product wholesaler and retailer Dalongyu, is one of many whose hopes of a more liberal market are pinned on the law, set to take effect on 1 August 2008. Businesses will be forbidden from forming cartels to fix prices and the State Council, China’s cabinet, will establish an anti-monopoly committee to investigate suspected monopolies. 

But the law has raised concerns in foreign-owned companies that it will open the way to more government intervention. From August next year, sensitive foreign acquisitions will be subject to a national security review and the law will also allow industries key to the ’national life line’ to be controlled by state-owned enterprises. 

Taking on the giants 

The troubles of smaller companies in China’s petrochemical sector stem from a 1998 reform that allowed giants like Sinopec and CNPC to buy swathes of oil-related businesses. The few remaining private players like Dalongyu managed to access oil from independent refineries. 

’But [now] the big giants force local oil refineries to stop supplying us and threaten to cut petroleum supplies to them if they don’t,’ Yu told Chemistry World. ’They say their control is for the national security, but who can see it? What we can see is their repeated moves to cut our oil supplies.’ 

CNPC refused to respond to  Chemistry World’senquiries and Sinopec was unavailable for comment. But others argue that the law will leave the industry largely untouched. 

Li Gang of the Chinese Academy of Social Sciences’ Institute of Industrial Economy believes there is already enough competition between the big industry players like Sinopec, CNPC and Sinochem. Downstream from them, there are thousands of smaller producers vying with each others to sell a variety of chemicals. ’So I see no reason [for them] to worry about the impact [of the law],’ Li told Chemistry World. 

Zhang Xiaosen, a partner of the Beijing-based Zhongzi law firm, says the extent to which the new law will limit monopolies depends on the Chinese administration. ’Although there are some exemptions made for them in the sake of national interest, the government will not tolerate the oil giants’ excessive exclusion of smaller private players,’ said Zhang, adding there could be further measures to force the big players to loosen their grip on the market. 

Looking abroad 

Meanwhile, dozens of smaller firms are reportedly turning to foreign companies like French oil giant Total. ’We think foreign oil giants could . supply oil to us,’ Zhang told  Chemistry World. ’They are our best hope of breaking the monopoly.’ 

But foreign firms have their own concerns about the new law. According to the European Chamber of Commerce China, firms are particularly concerned about the new ’national security review’ they will face if merging with or buying out Chinese firms. Others, however, doubt the review will prove onerous in practice. 

’Experience shows that the [Chinese] government is very cautious in dealing with foreign investments, particularly when there is no sign of overwhelming foreign dominance in any economic sector,’ said Zhang Yansheng, director of the National Development and Reform Commission’s Institute of Foreign Economics. 

The Ministry of Commerce’s annual report on foreign investment, released on 7 September, seems to back him up. It says that no Chinese industries are dominated by foreign firms and that - on the contrary - China must do more to attract overseas investment. 

But Zhang of the Zhongzi law firm urges foreign companies to come forward with their concerns as there are many aspects of the new law that will need to be clarified by future legislation. 

’I think the interest-expression routes are becoming more transparent and institutional in China,’ he said, ’which will enable foreign companies to more easily have their voice heard in the policy-making process.’