China's Industrial-Profit Growth Halves on Fuel Costs

By Li Yanping

June 27 (Bloomberg) -- Chinese industrial companies' profits grew at half the pace of a year earlier on record oil and coal prices, increasing the likelihood that economic growth will continue to slow.

Combined net income rose 20.9 percent to 1.09 trillion yuan ($160 billion) through May, the statistics bureau said today. That was less than the 42.1 percent gain in the first five months of last year.

China Petroleum & Chemical Corp., Asia's largest refiner, reported a record first-quarter profit drop and today's figures show a loss for oil refiners and processors of coking coal. Slower profit gains may cool investment, one of the main drivers of the world's fastest-growing major economy, as weakening global growth also dims the outlook for exports.

``Profits will be squeezed by higher raw-material and fuel costs throughout this year,'' said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. He forecasts economic growth will slow to 10.3 percent this year from 11.9 percent in 2007.

The CSI 300 Index of stocks has tumbled 47 percent this year on concern that weaker export demand and measures to tame inflation will also cut profits. It fell 4.7 percent as of 11:30 a.m. in Shanghai.

Oil refiners and the coking industry had a loss of 44.3 billion yuan over the five months, compared with a profit of 35.2 billion yuan a year earlier, the statistics bureau said. Power generators' profits fell 74 percent.

Fuel Prices Rise

Industrial companies' sales rose 29.3 percent to 18.4 trillion yuan through May from a year earlier. That's more than Italy's economic output for a year.

China last week raised state-controlled fuel and electricity prices, easing the burden on refiners and power generators. Thermal coal at Australia's Newcastle port, a benchmark for Asia, rose last week to a record for the fourth week.

The government has handed billions of dollars in subsidies to refiners, with China Petroleum & Chemical Corp., or Sinopec, getting $1 billion for April alone, according to a company official. Its shares were down 6.9 percent in Shanghai today after crude oil reached a record yesterday.

China's economy expanded 10.6 percent in the first quarter as export growth cooled and blizzards disrupted production by businesses such as Aluminum Corp. of China Ltd., the nation's largest producer of the metal. Chalco, as the company is known, says first-half profit will more than halve.

Snowstorms, Wages

Industrial profits rose 16.5 percent in the first two months from a year earlier.

Faster growth for the five months through May partly reflected the recovery after the snowstorms, said Shen Minggao, an economist at Citigroup Inc. in Beijing. Raw-material and wage costs ``will be a greater drag on profits in the second half,'' he said.

Coal-extraction industry profits climbed 98 percent. For oil and gas extraction, the gain was 54 percent. Iron and steel industry profits rose 26 percent.

China's demand for coal is increasing more quickly than its ability to produce it, ``resulting in a tight coal market and constantly rising prices,'' Macquarie Group Ltd. analysts led by Jim Lennon said in a report on June 23. Eight cities in central Henan province are having blackouts to limit power use because of coal shortages, the state-run Xinhua News Agency said today.

Earthquake Reconstruction

Reconstruction work after the May 12 earthquake that devastated parts of Sichuan province will increase demand for cement, steel, copper, aluminum and other materials, according to the central bank.

``Energy and raw-material prices have risen too fast and inflation pressures are continuing to build,'' it said in a report released this week.

Baosteel Group Corp., China's largest steelmaker, has agreed to a record price increase for iron ore and will pay at least 80 percent more for the steelmaking ingredient, Australia's Rio Tinto Group said this week.

Producer-price inflation accelerated to 8.2 percent last month, the fastest pace in more than three years, even as consumer-price inflation eased to 7.7 percent. The average urban wage was up 18.3 percent in the first quarter from a year earlier.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net;