Sinopec Shanghai Petrochemical has warned that cheap natural gas in the United States and coal from the mainland pose serious competitive threats to mainland crude oil refiners.

The subsidiary of China Petroleum & Chemical (Sinopec) that operates its second-largest oil refinery will have to cut costs and boost the uniqueness of its products, said Sinopec Shanghai vice-chairman Wang Zhiqing.

The firm produces petrol, diesel and jet fuel, as well as many downstream chemicals.

"We can't tell how severe the blow will be, but it will pose a serious challenge, and the entire industry will need to brace itself for the hit," he said. "We need to reduce costs and differentiate our products by adding more value."

He said about a dozen firms in the US have plans to build over 10 million tonnes of annual ethylene output capacity in the next three to five years, using gas as the raw material. Ethylene is a key base chemical used to make many downstream chemicals.

Technological advances in the extraction of previously uneconomic gas trapped between rock formations in recent years have seen US gas output rise an average 4.4 per cent annually for the past five years after flat or negative growth since the beginning of last decade.

Rising supplies have pushed US spot-market gas prices down from a record US$13.60 per million British thermal units in mid-2008 to just under US$2 a year ago, before a rebound to around US$4 currently.

Wang said petrochemical products made from low-cost US gas, especially those that are easy to transport, may find their way on to the mainland market.

Another threat comes from domestic producers of petrochemicals using coal as feedstock. So far only Shenhua Group and Datang International Power Generation have entered commercial production of downstream chemicals from coal that directly competes with producers that use crude oil.

"There is a lot of investment fervour on coal-based chemicals, with [Beijing] having received … applications totalling 50 million to 60 million tonnes of annual output capacity," Wang said.

Such projects first turn coal into methanol before processing methanol into polypropylene (PP) and polyethylene (PE) used to make plastic products.

Since methanol is in oversupply and Shanghai Petrochemical does not have an advantage in obtaining coal resources, Wang said it will only consider investing in projects that turn methanol into PP and PE.