Sinopec’s New Pipeline Operational

China’s largest refiner and marketer of refined petroleum products – China Petroleum and Chemical Corp. (SNP - Analyst Report), also known as Sinopec – recently announced that it has started the operation of a pipeline in southwestern China. It is a 323-kilometer oil products pipeline, which will ease local oil products supplies and also strengthen Sinopec's presence in the region.
 
The pipeline has a designated capacity to transport 2.9 million tons of oil a year and is expected to reduce the company’s costs in supplying fuel in the region. It runs within the Yunnan province, from Kunming (the capital city of the province) to Dali city.
 
The Yunnan province has traditionally been in Sinopec’s radar. While we view this operational achievement as a positive for the company, we are also concerned about the other companies’ interest in this region. PetroChina (PTR - Analyst Report) expects to enter this market through the construction of its Qinzhou refinery in Guangxi Zhuang Autonomous Region.
 
Sinopec’s leverage to the lucrative Chinese market is expected to help sustain its growth momentum. However, rising costs and special levies on domestic crude oil sales – as well as downstream-centric assets – continue to weigh on its valuation. As such, our Neutral recommendation for Sinopec stays unchanged at this stage.