LDN - Business

Oil refiner, soybean crusher collapse as China tightens credit

[July 23, 2018] BEIJING (Reuters) - A private oil refiner and an agricultural processor in China's Shandong province have filed for bankruptcy, as tightening credit and weakening market conditions exact a toll on one of China's industrial engines.

While the companies are relatively small compared with state-controlled companies, they represent deeper lingering problems faced by heavy industry across swathes of China.

Shandong Sunrise Group, a soybean crusher, registered for bankruptcy last week after failing to repay its debts, while Shandong Haiyou Petrochemical Group, an independent refiner, filed for joint bankruptcy with Shandong Hongju New Energy Co, a chemical trader. Both Haiyou and Hongju were previously controlled by Sunrise.

Haiyou is now majority owned by the local government, according to local government documents. The company is headquartered in Rizhao, in the eastern province of Shandong.

The applications were made in a court in Juxian county in Shandong on July 16, according to filings posted on a website run by China's Supreme Court on Friday.

Few other details were available about the cause of the companies' problems. The companies did not respond to requests for comment.

But their financial plight underscores deepening financial pain among small teapot refiners and crushers alike. Many operators in both sectors are losing cash as a domestic glut of product hurts margins.

It also highlights concerns about growing debt and tightening credit for small businesses as Beijing seeks to crack down on financial risks across its economy.

In Shandong, China's third largest province by gross domestic product, is an industrial and agricultural hub, home to farms, refiners and soybean crushers.

The non-performing loan ratio of its banking sector stood at 2.64 percent at end-March, compared with 1.75 percent nationwide.

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TIP OF THE ICEBERG?

Shandong Sunrise, which is run by Shao Zhongyi, China's 230th richest man according to Forbes' 2016 rich list and his brother, accounted for an estimated 12 percent of China's soybean imports in 2014, although it has shrunk in size in recent years, according to traders. https://reut.rs/2uRwCkQ

Its financial problems are due to falling demand for animal feed after pig farmers in China, the world's biggest pork consumer, began culling their herds because of declining meat prices. Crushing companies reduce soybean seeds to both oil and meal.

Crushers in Shandong are losing almost 50 yuan ($7.40) per ton of soybeans they process, according to Shanghai JC Intelligence.

China's vast farm sector is also facing uncertainty as Washington's trade dispute with Beijing threatens to curb supplies of critical farm goods, including soybeans, and inflate costs.

Haiyou is the first bankruptcy by a teapot refinery since China liberalized oil imports in 2015 to increase competition in a sector dominated by state-owned giants.

Many of China's independent refiners, which buy a fifth of imported crude, are losing cash due to the resurgent oil price, tough new taxes and shrinking diesel demand.

"It's the tip of the iceberg," said Harry Liu, oil consultant with IHS Markit. "We may see more smaller plants, especially those without import quotas, fold, as their margins are squeezed harder."

He said that the change was a sign that a tax policy begun by Beijing in March was having "a bigger blow on some of the teapots than we expected".

Beijing enacted new rules in March to enforce collection of a $38 per barrel gasoline consumption tax and a $29 per barrel tax on diesel, a response to the alleged use of illicit fuel invoices by many of the teapots to evade the taxes.

(Reporting by Josephine Mason, Aizhu Chen, Dominique Patton, Hallie Gu; additional reporting by Shu Zhang; Editing by Philip McClellan)

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