Peiyang Chemical Equipment Co., Ltd.
The Review of the Alliance Work and the Next Step

The background on the establishment of the independent refinery procurement alliance

The liberalization of the right to import crude oil and import rights has brought new development opportunities to independent refiner, but it has brought many disadvantages and challenges.

The characteristics of the independent refinery enterprise:

1. Lack of market status, lack of available resources and lack of international negotiation business will lead to competitive bidding and bad competition.

2. The international domestic implementation capacity is obviously deficient, the procurement volume is small, the price is bound to be high, they will increase the unnecessary cost of the enterprise.

3. Most enterprises cannot afford to accept large orders and overburden capital pressure, international credit capacity and credit payment are restricted.

4. Only Huangdao and Rizhao have VLCC landing dock, the largest number of Dongying ports in refinery enterprises can be discharged from the following oil tankers. Small boats cost more to transport.

The purpose of the establishment of the independent refinery purchasing alliance

1. Avoid disorderly bidding and reduce undesirable competition;
2. Improve intensive efficiency;
3. Centralized loan and settlement, reducing capital pressure and interest;
4. Centralized logistics to reduce transportation costs;
5. It will help to play a synergistic role with central oil, Sinopec, Cnooc and other central government import departments.

Alliance platform company - Singapore Pacific commercial holding company
In the first half of 2016, the average CIF price of the crude oil for Dongming petrochemical company was 200 USD/ton, which is 40.1 USD/ton less than the average price of crude oil imported from Qingdao port, and 16.7% lower than the national price in the same period.

Overseas platform advantage: the overseas purchasing team has abundant crude oil and paper cargo operation experience, which greatly reduces the purchase cost of real crude oil.

Advantage of low cost of capital: Dongming petrochemical to wholly owned overseas subsidiary - prudential trade co., LTD and Singapore Pacific commercial holdings co., LTD., as a platform, they can make full use of foreign funds low cost advantage. The average annual interest rate of overseas comprehensive financing is kept within 2%, which is well below the annual financing cost of 4.35% in China.

Advantages of low logistics transportation cost: Through the reasonable arrangement of the VLCC with the members of the alliance, effectively reduce the logistics cost centralized purchasing, centralized transportation, and reduce the transportation cost.

After the establishment of the alliance, respectively in March, April, May, June, July, August, September and October carried out "into the Dongming petrochemical", "into the Singapore", "into the Qingyuan group, entered the Tianhong chemical" and "walk into Ji'nan and procurement plan floor plan study", "Walk into Luqing", "enter South Korea", "walk into Wudi Xinyue" and other special topics. This will help the members of the inferior alliance understand the trend of the international crude oil market and the development trend of the international petrochemical industry,  it can enhance the international oil purchasing capacity of enterprises and enhance communication among members of the alliance. And organize the member units of the alliance to participate in the business training, to the major oil companies to inspect and so on. Since 2016, we have purchased nearly 13 million tons of crude oil (including dongming petrochemical) from the company of Singapore Pacific company.

Future efforts of the alliance

1. Overseas blending of raw materials

Crude oil is adjusted overseas to reduce prices, save production costs and store costs from the perspective of supply.

2. Build pipeline, logistics, warehousing system

Driven by the government, the enterprise is led and implemented the following three development directions:
1). Accelerate the construction of crude oil terminal
2). Build reserve tank area
3). Joint charter, float or spline
4). Accelerate the construction of pipelines

3. Unified negotiations, the signing of the oil treaty

The structural features of the production facilities of the independent refinery, the centralized procurement of the alliance, the savings of logistics costs, the operation of funds, and the stable demand provide the conditions for long-term oil contracts. The alliance plans to speed up direct talks with national oil companies to build up the pool of funds, to secure oil sources, lock in costs and prevent the cost of rising oil prices.

4. Rapid integration of financial markets

The oil trading has strong financial attributes, exchange rates, interest rates, and volatility in commodity futures markets are both risky and opportunistic. The alliance will graft into the financial business, avoid the risk of exchange rate fluctuations in crude oil purchases, interest rate changes between countries, and the risk of pricing in crude oil purchases, and make gains.

In the economic system of public ownership, large oil state enterprises and state-owned enterprises have long been in the dominant position of energy industry. Local independent refineries are just "catfish" in the industry. Once the catfish has obtained the status of the same market subject, it will be fair to the industry and the policy, and will surely achieve rapid development and contribute to the national economy.