March 29 (Bloomberg) -- China Petroleum & Chemical Corp., Asia’s biggest refiner, posted 2008 profit that beat estimates and said first-quarter earnings will surge more than 50 percent after fuel-price controls were relaxed and oil costs fell.

Net income fell 47 percent to 29.8 billion yuan ($4.36 billion) last year, the Beijing-based company, known as Sinopec, said in a statement in Hong Kong today. The median estimate of 21 analysts was for a profit of 25 billion yuan. Sales rose 21 percent to 1.42 trillion yuan.

Profit is set to rise after the government assured refiners a profit and crude oil futures in New York slumped 64 percent from a July record. The new mechanism for setting gasoline and diesel prices will end “years of losses” at refineries, Sinopec, supplier of 80 percent of China’s fuel, said today.

“The situation this year is a lot better,” said Larry Grace, a Hong Kong-based independent oil analyst. “The big if is will the government honor that promise?”

Profit for the three months ended Dec. 31 soared 98 percent to 13.3 billion yuan, the biggest quarterly increase since 2007, according to Bloomberg calculations made by subtracting earnings for the first nine months from full-year figures released today. Sinopec spokesman Huang Wensheng couldn’t be reached on his mobile phone to confirm the derived figure.

Earnings in the first quarter may rise from 6.7 billion yuan a year earlier, Sinopec said today.

Sinopec shares have gained 13 percent in Hong Kong trading after China raised fuel prices by as much as 5 percent starting March 25. The stock closed at HK$4.98 on March 27.

‘Major Profit Contributor’

Profit in 2009 may surge to 46.4 billion yuan, according to the median estimate of 24 analysts.

“Sinopec will be able to make full use of its advantages in marketing and management, turning its refining operations into a major profit contributor,” Sinopec said in its earnings announcement.

Sinopec said capital expenditure will rise 4 percent to 111.8 billion yuan this year. Spending on refining will increase about 35 percent to 16.8 billion yuan while that on exploration will decline by 4.6 percent to 55 billion yuan, it said.

The government in December replaced a guidance band for retail fuel prices with a market-based ceiling that includes the cost of crude oil, taxes and an “appropriate profit” for refiners.

Fuel Prices

Gasoline and diesel prices will be adjusted when crude costs change by more than 4 percent over 22 straight working days, and refiners will be allowed a profit margin of at least 5 percent, said Zhou Jiping, president of rival PetroChina Co.

Sinopec will gain more from the relaxation than PetroChina or Cnooc Ltd., which draw most of their revenue from oil production.

PetroChina, the world’s second-largest company by market value, said last week 2009 may be its “most challenging” year after refining losses and a slump in crude oil prices led to its first annual profit drop since 2001.

About 76 percent of Sinopec’s revenue comes from refining and marketing and distributing petroleum products, according to the company’s 2007 annual report. Only two percent is from oil exploration and production.

Operating losses from refining surged to 102 billion yuan last year from 13.7 billion yuan in 2007, Sinopec said. The company received 50 billion yuan in government subsidies.

‘Margins Assured’

Sinopec’s windfall tax payment increased by 21.6 billion yuan, it said without giving a figure for the year. Chinese oil producers pay a tax on revenue from crude sold above $40 a barrel under a levy introduced in March 2006.

Eighteen out of 24 analysts in a Bloomberg survey recommend buying Sinopec shares, compared with 11 for Cnooc, China’s third-largest oil company. Ten out of 23 rate shares of larger PetroChina a “buy.”

“Some investors who would never have considered Sinopec before are now interested because there is evidence that Chinese refiners profit margins are assured,” said Graham Cunningham, an energy analyst at Citigroup Inc. based in Hong Kong.

The refiner’s unlisted parent, China Petrochemical Corp., said on March 23 its first-quarter performance is “better than expected” and the country’s demand for some oil products is recovering.

Oil processing at Sinopec’s refineries may increase 8.9 percent to 184 million tons this year, the company said. Sinopec plans to boost crude oil output by 1.4 percent to 42.4 million tons and natural gas production by about 20 percent to 10 billion cubic meters.

To contact the reporters on this story: John Duce in Hong Kong at Jduce1@bloomberg.net; Wang Ying in Hong Kong at Ywang30@bloomberg.net

Last Updated: March 29, 2009 09:25 EDT