China National Chemicals Import Export (Sinochem), China's largest chemicals trader, has begun moving to acquire Inchon Oil Refinery, a bankrupt South Korean company.

The two companies entered into a preliminary agreement, or a memorandum of understanding, in late May, said sources from Inchon, South Korea's smallest of five oil refineries.

Sinochem was picked over three South Korean bidders, and the deal will be worth approximately US$556 million, sources said. The South Korean bidders were Paul Oil, Ko Pec and STX, which owns STX Shipbuilding.

Sinochem has reportedly offered a down payment to Inchon and will sign a final agreement in a few months, probably in August.

"The deal is still being negotiated," said Wang Zongshao, who is in charge of mergers and acquisitions at Sinochem, "and our application to the National Development and Reform Commission is being processed." Overseas investment that exceeds US$1 million has to be approved by the commission.

Wang confirmed that Sinochem has made a down payment, but he refused to reveal the amount. "We will announce the final deal after it is signed," he said. "Now we are not going to say too much."

Analysts say the deal is very likely to receive approval, as the country is experiencing a raw materials shortage and is pushing a "go-global" campaign for large state-owned firms.

China's economy grew at the brisk pace of 9.7 percent in the first quarter, driving up demand for fuel and raw materials.

Even if growth slows in the remainder of the year because of the government cool-down measures, China's appetite for oil products will remain strong.

Sinochem is following the nation's biggest petrochemicals companies, including PetroChina and China Petroleum and Chemical Corp., in acquiring assets overseas.

Inchon Oil has the capacity to process 275,000 barrels of crude oil a day. Its annual capacity is 14 million tons, about 2 million less than China's largest oil refinery, Zhenhai Refining and Chemical Co. The company has been in receivership since defaulting on loans in 2001.

Analysts say the acquisition is part of Sinochem's efforts to diversify its business in recent years. The company was a pure trader, monopolizing oil trade in China for 40 years until 1993. Squeezed by newcomers in the trade sector, the firm is gearing up to tap upstream and downstream industries, including oil exploration, processing and sales.

The company's license for sales of refined oil products is still pending. Currently, only China Petroleum and Chemical, PetroChina and a few private sector companies are allowed to sell refined oil products.

Sinochem has recorded steadily rising profits in the past months.

Sinochem International Co. Ltd., its listed arm in Shanghai, posted a net profit of 126.6 million yuan (US$15.3 million) in the first quarter, up about 94 percent year-on-year.

(China Daily June 18, 2004)