A. History and Development of the Company

General Information

We were established in the People’s Republic of China as a joint stock limited company under the Chinese Company Law on June 29, 1993 as Shanghai Petrochemical Company Limited. On October 12, 2000, we changed our name to Sinopec Shanghai Petrochemical Company Limited. Our registered office is at No. 48 Jinyi Road, Jinshan District, Shanghai, China 200540. Our telephone number there is (86-21) 5794-1941.

Our Predecessor

Our predecessor, Shanghai Petrochemical Complex (the “Complex”), was founded in 1972 as one of the first large scale Chinese petrochemical enterprises using advanced imported technology and equipment. Prior to June 29, 1993, the Complex was wholly-owned by Sinopec Group, at the time a ministerial level enterprise (before its restructuring in 1998, “Sinopec”). The Complex’s location was chosen because of accessibility by water and land transportation to Shanghai, a major industrial city of China, and the availability of reclaimable land. The Complex was initially under the administration of the Ministry of Textile Industry and in 1983 was placed under the administration of Sinopec.

Construction Projects

The Complex and we, as its successor, have completed six major stages of construction. The first stage of construction (1972-1976) included reclamation of land and the installation of 18 production units. The second stage of construction (1980-1986) increased the Complex’s capacity for processing crude oil and doubled its capacity for synthetic fiber production. The third stage of construction (1987-1992) primarily consisted of the installation of a 300,000 ton Rated Capacity ethylene unit, an additional crude oil refining unit and other units for the production of petrochemical products. The third stage of construction completed our transition from a synthetic fiber producer to a highly integrated producer of a wide variety of petrochemical products. The fourth stage of construction (2000-2002) mainly included the 700,000 ton Ethylene Expansion Project and Coal-Fired Power Plant Expansion Project. The fifth stage of construction (2003-2009) was mainly designed to optimize our structure and realize sustainable development, and mainly included 3,300,000t/a diesel hydrogenation unit, 1,200,000t/a delayed coking unit and other projects implemented for removing “bottlenecks” in refinery, the building of new 600,000t/a PX hydrocarbon complex unit, 150,000t/a C5 segregation unit, 380,000t/a ethane unit, etc.

The Company commenced the sixth stage of construction in 2010 (the “Phase 6 Project”) and completed in December 2012. The key component of the Phase 6 Project was the refinery revamping and expansion project. The Phase 6 Project also included the technology development and fine chemicals projects. The purpose of the Phase 6 Project was to improve the Company’s overall industrial structure, core competitiveness and the capability of maintaining sustainable developments. The Phase 6 Project was focused on the objective to achieve intensive utilization of natural resources and the build-up of a complete set of facilities, in accordance with the fundamental industrial model of integrating oil refining and petrochemical production. Through this project, the Company intended to further enhance its oil refining process and strengthen and expand the Company’s core businesses while continuing to explore the development of fine chemicals and products with high value added. See Item 4. Information on the Company – D. Property, Plant and Equipment – Capital Expansion Program .

Over the past four decades, the Company has built up an infrastructure system to support its production needs. The Company has its own facilities to supply water, electricity, steam and other utilities and to treat waste water, as well as ocean and inland waterway wharfs and railroad and road transportation facilities.

Our Initial Public Offering and Listing

We were established as a subsidiary of Sinopec on June 29, 1993. In preparation for our initial public offering of ordinary shares, all assets and liabilities of the Complex were transferred either to us or to Sinopec Shanghai Jinshan Industrial Company (“JI”), a separate subsidiary of Sinopec. The Complex’s non-core businesses and assets, such as housing, stores, schools, transportation and medical services, were transferred to JI. The Complex’s core business and assets were transferred to us. The Complex then ceased to exist as a legal entity. In 1998, Sinopec was restructured into a limited liability company under the name of China Petrochemical Corporation. On February 25, 2000, Sinopec Group transferred its interest in us to its subsidiary, Sinopec Corp. In 1997, JI was restructured and its subsidiaries were either transferred to Sinopec or Shanghai Jinshan District. Sinopec Group now provides community services to us that were formerly provided by JI.

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Our H Shares were listed on the HKSE on July 26, 1993. Our ADSs, each representing 100 H Shares, are listed on the New York Stock Exchange (“NYSE”). Our domestic shares are listed on the Shanghai Stock Exchange. We were the first Chinese joint stock limited company to have securities concurrently traded in Hong Kong, the United States and China. On November 8, 1993, our domestic shares were included in the Shanghai Stock Exchange Stock Index.

Domestic Share Reform

Pursuant to regulations issued by the CSRC, we were required to obtain shareholder approval for and implement certain share reform. As a result of such share reform, all non-publicly tradable domestic shares of the Company would be converted into publicly tradable domestic shares and may be sold publicly on the Shanghai Stock Exchange subject to any applicable lock-up period.

In connection with the share reform, the Distribution Proposal regarding 2013 Interim Distribution of Cash Dividend and the Conversion of Capital Fund and Surplus Reserve into Shares of the Company (“Proposal”) was approved at the Company’s 2013 First Extraordinary General Meeting, 2013 First A Shareholders Class Meeting and 2013 First H Shareholders Class Meeting held on October 22, 2013. According to the Proposal, based on the Company’s total share capital of 7,200,000,000 shares as of June 30, 2013, RMB2,421 million of the capital surplus of the Company from its share premium account will be used to fund the issue of 3.36 new bonus shares with respect to every 10 issued and outstanding shares, and the surplus reserve will be used to fund the issue of 1.64 new bonus shares with respect to every 10 issued and outstanding shares, and an interim cash dividend of RMB0.50 (tax included) for every 10 issued and outstanding shares will be distributed to all shareholders.

In addition, Sinopec Corp. undertakes under the Proposal that it shall not, within 12 months from the date on which Sinopec Corp. becomes entitled to trade, deal in or transfer its non-publicly tradable shares of the Company in the market (meaning the first trading day after the implementation of the Proposal), trade such shares in the market. Also, after the expiration of the aforesaid 12-month term, the amount of existing non-publicly tradable shares to be disposed of by Sinopec Corp. through trading on the stock exchange shall not represent more than 5% of the total number of our shares held by Sinopec Corp. within the next 12 months, and not more than 10% within the next 24 months.

Immediately upon completion of the conversion of capital surplus and surplus reserve into new shares of the Company, the total number of domestic shares of the Company reaches 7,305,000,000, and the total amount of H Shares of the Company reaches 3,495,000,000. Therefore, the Company’s total share capital consists of 10,800,000,000 shares. Sinopec Corp., being the controlling shareholders of the Company, holds 5,460,000,000 domestic shares, representing 50.56% of the total share capital of the Company.

The share certificates of new H Shares issued in connection with the share reform have been dispatched and the cash dividend has been paid to the holders of H Shares on December 4, 2013. The dealings in the new H Shares commenced on December 5, 2013.

Description of Principal Capital Expenditures and Divestitures

In the fourth quarter of 2001, we established Secco, together with BP Chemicals East China Investments Limited (“BP”) and Sinopec Corp. We own 20%, while BP and Sinopec Corp. own 50% and 30% of the equity interest of Secco, respectively. Secco was established to build and operate a 900,000 ton Rated Capacity ethylene petrochemical manufacturing facility in order to manufacture and market ethylene, polyethylene, styrene, polystyrene, propylene, acrylonitrile, polypropylene, butadiene, aromatics and by-products; provide related after-sales services and technical advice with respect to such petrochemical products and by-products; and engage in polymers application development. Secco completed construction in 2005. Secco’s registered capital is U.S.$901,440,964 of which we were obligated to contribute an amount in Renminbi equivalent to U.S.$180,287,952 prior to the end of 2005. As of December 31, 2005, we had contributed such amount in full.

In 2009, Secco completed the reconstruction and capacity expansion of ethylene cracking and downstream derivatives facilities. The capacity of ethylene cracking facility has been expanded to 1,090,000 tons per year.

To fund Secco’s new acrylonitrile plant project with a capacity of 260,000 tons/year, its new ethylene plant with a new supercharger, its new butadiene plant with a capacity of 90,000 tons/year, and its utility facilities upgrading project, the shareholders of Secco agree to increase the registered capital of Secco by U.S.$150,085,618 according to their respective shares in the equity interests in Secco, of which the Company is obligated to contribute an amount of U.S.$30,017,124. We will pay such amount in installments with the equivalent value in RMB by January 24, 2016.

For a description of capital expansion projects related to our facilities, see Item 4. Information on the Company – D. Property, Plant and Equipment – Capital Expansion Program .

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B. Business Overview

We are one of the largest petrochemical companies in China based on 2013 net sales and ethylene production. Our highly integrated petrochemical complex processes crude oil into a broad range of products in four major product areas:

Based on 2013 sales volumes, we are a leading Chinese producer of synthetic fibers and resins and plastic products. We believe that we are also a leading competitor in sales of petroleum products and intermediate petrochemicals in our regional markets.

Our net sales by business lines as a percentage of total net sales in each of 2011, 2012 and 2013 are summarized as follows:

Net Sales of RMB89,509.7 million in 2011

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Net Sales of RMB87,217.3 million in 2012

Net Sales of RMB105,503.2 million in 2013

We derive a substantial portion of our revenues from customers in Eastern China (principally Shanghai and its six neighboring provinces), an area that has experienced economic growth above the national average in recent years. We believe that we are well-positioned to take advantage of opportunities which may arise through the growth of economy of China generally and in this area in particular. Shown by geographic region and exports, our net sales by business lines as a percentage of total net sales for each of 2011, 2012 and 2013 are as follows:

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Business Strategy

In 2014, we expect that our business and operating conditions will remain challenging. We aim to fully exploit the potential of the refinery revamping and expansion project (completed as part of the Phase 6 Project) with the view to further improving the refining and chemical integration of our operations and continuing our efforts to ensure the high safety and environmental protection standards, the stable operation of our facilities and equipment so as to enhance the quality of our products and, the economic return of our development and achieve sustainable growth.

To achieve our business objectives in 2014, we will work diligently to fulfill the following tasks:

(a) Continue to focus on safety and environmental protection and promote energy conservation and emissions reduction

We will continue to implement a strict safety management system, improve our production safety responsibility system and implement the production safety responsibility system at all levels. We plan to launch the health, safety and environmental protection (“HSE”) information management system. In order to improve our HSE management skills, we will establish a highly-regulated and standardized operation management process, and use quantifiable criteria to evaluate performance and efficiency. We will increase our efforts to improve the environment and control odor. We will also carry out the implementation of our “Green Water and Blue Sky” project, which was initiated by the Sinopec Group in 2013 as the largest pollution control project ever launched in China’s petrochemical industry. As part of this project, we will launch a denitrification project for furnaces No. 1 and 2, an optimization and renovation project for desulfurization facilities at furnaces No. 1 – No. 4, as well as a project to improve the sewage treatment efficiency and sewage recycling. We will continue to undertake activities that are in line with and promote the concept of “green and low carbon, saving energy and reducing emissions.” Such activities include managing energy ( e.g. , water and steam), continuing to compile statistics on carbon emissions, engaging in carbon trading, and keeping track of power consumption of our electrical equipment. Furthermore, we will accelerate the progress of our work on reducing flare gas emissions, constructing recycling projects and implementing energy-saving technologies.

(b) Continue to optimize our operations so as to enhance economic efficiency

We will continue to strengthen the management of our crude oil procurement, and increase the proportion of high-grade fuel oil products. We will further improve the refining and chemical integration of our operations, and the composition of our refined oil products. We will improve our profit and loss calculation models for major plants, monitor their contribution to our margins and arrange our production operations accordingly so as to achieve greater efficiency. We will optimize the use of raw materials for ethylene cracking and aromatics production, as well as the composition of plastics and synthetic fibers products. We will strive to strengthen and improve our quality control in sales and marketing. We will focus on improving the correlation between production and sales, in particular the correlation among the production, sales, and research and development of new products. In order to reduce the cost of sales, we will further optimize the scope of sales area of our products, our internal operations and the delivery models for our products. We will further improve our budgetary management and improve our asset management over the lifespan of our assets with a view to reducing our financing costs and optimizing our financing structure. Furthermore, we will strengthen our tax planning management on obtaining more preferential tax treatment, as well as other benefits. We will also continue to exercise stringent controls over costs and non-operational expenses.

(c) Strengthen the management of our production and operations to ensure the stable operation of our plants

We will strengthen the management of our production and operations in order to maintain the stable operation of our plants. We intend to achieve this objective by implementing a stricter plant overhaul management scheme. Our new scheme will arrange and coordinate plant productions, create a plant start-up and shut-down scheme, optimize materials mixing, and carry out regular on-site facilities maintenance. We will continue to improve the operational management of our public utilities and other systems in order to safeguard the stable operation of our production plants. In order to ensure the improvement of the major technical and economic indicators that we monitor and compare annual results of, we will enhance the management of our production procedure and technology and strengthen our efforts on work supervision and assessment. In addition, we will improve our on-site plant management, increase plant utilization and through this we will ensure the continued operation of our plants for a significantly extended period of time.

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(d) Pursue new development projects, technological advancement and the construction and upgrading of our information systems

We will strengthen the research on our development strategy, accelerate our efforts on the adjustment of our business structure, and devote more efforts to production safety, environmental management and technological advancement in order to gradually transform and phase out existing outdated production capacity. We will actively evaluate and implement a new round of development projects to further facilitate the integration of our refining and chemical facilities, produce more light products, establish a more cost-effective operating process, and develop a stronger capacity to address market risks. To develop new products, we will focus on the development and promotion of fine chemical technologies, technologies for the industrialized production of high-performance fiber, technologies for the production of new plastics and unconventional high value added polyester, energy saving and environmental protection technologies. This will also help us adjust the structure of our existing products based on market demand and for the purposes of achieving a higher profit margin. We will also continue to develop, and broaden the application of, our information systems, including commencing the construction of the advanced process control (“APC”) systems for our No. 3 atmosphere vacuum distillation facility and No. 1 Ethylene glycol facility; constructing and upgrading 15 sets of process simulation systems; constructing a radio frequency identification (“RFLD”) warehouse management system, completing the development of a comprehensive statistical information system and the expansion and application of a real-time database system.

(e) Improve corporate management to maintain the continuous improvement of our management standards

We will further enhance our focus on the corporate management of our business and adopt appropriate changes in our management procedures, formulate and implement a plan to further strengthen the specialized and centralized management of our electrical system, streamline our operations, secure certifications for our research and development capacities, promote the adoption and use of a more upgraded energy system, continue to improve our performance appraisal system, maintain our focus on performance evaluation for relevant units and other organizations within our Company, improve the correlation between individual performance evaluation and related organizational performance evaluation, conduct a comprehensive evaluation of all of our professional service units so as to improve our specialized management, and continue to improve our operations and management with a view to fostering our staff’s enthusiasm for and creativity in work.

(f) Strengthen team building and create a stable and harmonious environment for us

We will continue to focus on the development of our human resources. We will increase our human resources pool, bring in new talent and improve the composition of our workforce. In order to improve our employees’ skills and performance, we will provide high-quality training to our employees, accelerate the implementation of set of training programs whereby our employees can learn job-related skills in an environment that simulates actual production and operation scenarios, and launch occupational training programs and competitions. In addition, we will broaden the channels for employee development, and focus on the development of talent exchange programs for our employees and the overall optimal deployment of our workforce. We strive to establish a corporate culture which emphasizes on the protection of the legal rights of our employees, and in turn contributes towards the improvement of employee performance. Furthermore, we will continue to promote our worker representatives system, increase the transparency of our governance and policies and engage in fair negotiations on the collective employment contracts with our employees. By doing so, we aim to promote a harmonious employment environment for our staff and maintain the stability of our business.

Principal Products

We produce four principal types of products with different specifications, including synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products. We use many of the important petroleum products and intermediate petrochemicals we produce in producing our own downstream products.

In 2013, with the completion and launching of the refinery revamping and expansion project as part of the Phase 6 Project, the volume of our physical production increased, with a total volume of products amounting to 15,604,300 tons, representing an increase of 31.75% over the previous year. We continue to produce premium products of a stable quality.

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The following table shows our 2013 net sales by major products as a percentage of total net sales together with the typical uses of these products.

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Production Processes

The key sectors in our vertically integrated production plants are the ethylene units which produce ethylene and propylene, and our aromatics plants which principally produce paraxylene (“PX”) and benzene. Ethylene is the major raw material in the production of polyethylene (“PE”) and monoethylene glycol (“MEG”) which, together with pure terephthalic acid (“PTA”), is used to manufacture polyester. Propylene is the major raw material in the production of acrylonitrile and polypropylene (“PP”). These products are produced through the processing of a series of petrochemical units from crude oil. Our production processes are shown in the flow chart below.

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Our refinery units refine crude oil into five basic components: (1) naphtha, (2) kerosene, (3) atmospheric gas oil (“AGO”), (4) Vacuum Gas Oil (“VGO”), and (5) residual oil. Part of the Naphtha and part of the AGO is fed to the ethylene units primarily to produce ethylene and propylene. Part of the Naphtha is fed to the reforming prehydrogenation units to produce refined Naphtha which will be used for the production of Aromatics. The other part of the AGO is processed into diesel oil, and kerosene is fed to the jet fuel sweetening unit to produce jet fuel. Part of the VGO is further processed in a hydrocracking unit producing mainly light and heavy naphtha, liquefied petroleum gas (“LPG”), diesel oil, various aromatic hydrocarbon products and jet fuel. The other part of the VGO and residual oil can be further processed into gasoline, diesel oil, LPG, propylene and other products.

Intermediate Petrochemicals

Ethylene – Ethylene is either directly processed into PE resins or processed into other intermediate petrochemicals. The most important of these is MEG. MEG is a key ingredient in polyester. It is produced by oxidizing ethylene in the ethylene oxide (“EO”)/ethylene glycol (“EG”) unit. Ethylene is also used to produce vinyl acetate which is processed into polyvinyl alcohol (“PVA”).

Propylene – Propylene is either processed directly into PP resins or is further processed into other intermediate petrochemicals such as acrylonitrile, acetonitrile, hydroxyl acetonitrile and sodium cyanide. Acrylonitrile is used in producing acrylics.

Vacuum gas oil – VGO is passed through the hydrocracker, and the resulting heavy naphtha is fed into the aromatics plants to produce PX and benzene. PX is processed into PTA, one of the principal raw materials in producing polyester.

Resins and Plastics and Synthetic Fibers

We process our intermediate petrochemical products into five kinds of synthetic fiber raw materials: (1) polyester, (2) acrylonitrile, (3) PP, (4) PE and (5) PVA. Each of these five products has its own production line or lines. We further process polyester and acrylonitrile into various types of synthetic fibers.

Polyester – MEG and PTA are fed into a polymerization unit which produces polyester chips and polyester melt. Both chips and melt are used as raw materials in the production of polyester staple and filaments. Some chips are also sold to third parties.

Polyester staple fiber is a multi-strand fiber cut into short lengths which can be spun into fabric on its own or blended with cotton, wool or flax to produce textiles. Polyester filaments are a class of more highly processed polyester materials which have been drawn and oriented to produce a long thread-like fiber.

Acrylonitrile – We produce polyacrylonitrile by feeding acrylonitrile into a polymerization unit. By passing the polyacrylonitrile through the fiber unit, acrylic fiber and acrylic staple fiber are produced, including cotton and wool type staple fibers. Wool acrylic staple fiber can be processed into acrylic wool strips.

Polypropylene – We produce PP resins by feeding propylene into a polymerization unit. Our fiber grade PP resin is the main ingredient for PP fiber production.

Polyethylene – We have three sets of units producing PE, two of which produce low-density polyethylene (“LDPE”) using the kettle type process, and the other unit produces all density PE products using the Borstar bimodal process.

Polyvinyl acetate – PVA granules are produced from vinyl acetate (“VAC”), derived from ethylene.

Raw Materials

In 2013, we fully exploited the advantage and potential of the refinery revamping and expansion project that was completed as part of the Phase 6 Project. As the newly established refinery facilities enjoyed more adaptability and were built with upgraded materials, we could increase the degree of concentration for crude oil procurement and focus on more ideal sources of crude oil so as to reduce our procurement cost. The shutdown of No.1 delayed coker and the optimization of residual oil processing systems resulted in the optimal efficiency of oil residue processing. By optimizing the composition of refined oil and increasing the proportion of high-grade refined oil products, the ratio of diesel to gasoline decreased from 3.95:1 in 2012 to 1.72:1 in 2013. Production output of No. 95 gasoline or above increased by 109.44% year-on-year, and jet fuel production increased by 52.88%. We fully utilized the SPYRO software, which is Technip’s proprietary model for steam-cracking yield prediction and complete furnace simulation of either gas or liquid feedstock, to optimize the structure of ethylene cracking and aromatics feedstock. The fuel structure was also improved by the replacement of natural gas with by-product plant dry gas. We also continued to optimize the operation of our flare gas recovery system. By properly calculating the economic efficiency of the production facilities, our cost-effective facilities were operated at full capacity while those loss-making facilities were operated with minimal load.

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Crude Oil

Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2013, crude oil accounted for approximately 69.36% of our total cost of sales. Accordingly, the supply and price of crude oil are key factors in determining our profitability.

Supply and Transportation – All crude oil required by us, whether from domestic or foreign sources, is purchased through the channels of Sinopec Corp. as an agent. During 2013, we did not experience any significant problems in obtaining sufficient crude oil to meet our production needs.

Sinopec Group is responsible for preparing an annual plan on demand and supply for crude oil and petroleum products that forms the basis of the Chinese government’s annual “balancing plan” which effectively dictates our planned volume of crude oil processing in each year. Likewise, under the “balancing plan”, some of our petroleum products are designated for sale to the subsidiaries of Sinopec Group or other designated customers at market prices and we must consult Sinopec Group to sell elsewhere.

We have received confirmation from Sinopec Corp. that it will purchase on our behalf 14.5 million tons of domestic offshore crude oil and 0.1 million tons of imported crude oil in 2014. Sinopec Corp. has further confirmed that, subject to China’s national crude oil policy and our actual production needs, it will continue to purchase on our behalf sufficient quantities and appropriate kinds of crude oil, including domestic offshore and imported crude oil, to satisfy our anticipated annual needs. We anticipate that we will fully utilize our 2014 supply of crude oil. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2014 production capacity and targets. Additionally, as part of China’s commitment at its accession into WTO, certain non-state-owned enterprises have been granted an increasing amount of quota to import crude oil. Although we do not expect to obtain crude oil through this channel in the foreseeable future due to the current crude oil supply system, this may provide us with an alternative source of crude oil supply.

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Crude Oil Mix – Our refining equipment is designed to process certain grades of crude oil. Therefore, the origin and quality of the crude oil available can be important to our business. We believe that as we have been significantly increasing usage of imported crude oil, we will continue to be able to obtain from the market such imported crude oil that is compatible with our refining equipment. The overall mix of foreign versus domestic crude oil we process in 2014 will depend on a variety of factors, including the amount of future supply of domestic offshore crude oil and the availability, price, quality, processing profitability and compatibility with our refining capabilities of imported crude oil. Provided there are no significant modifications to the existing channels of crude oil supply, we believe that sufficient supplies of crude oil will be available on the domestic or international markets for our 2014 production capacity and goals.

In 2013, our crude oil was sourced as follows:

As a result of a consistent decrease in the supply of domestic crude oil, we expect that we will continue to rely principally on foreign sources for our crude oil supply. However, we believe that we will be able to maintain our processing efficiency through technological adjustments of our equipment and quality control and that increased use of imported oil will not materially adversely impact our business and results of operations.

Foreign and domestic offshore crude oil is supplied by tanker and pipeline to our oil terminal wharf and oil storage tank. See Item 4.D. Property, Plants and Equipment -Wharfs .

In the past, we have not experienced disruption in our crude oil supply. We have on-site crude oil storage tanks at Chenshan wharf capable of storing approximately 300,000 cubic meters of crude oil, primarily to provide crude oil to our No. 2 atmosphere vacuum distillation facility. This crude oil storage can provide us with approximately a 2-week supply of crude oil. The crude oil for our No. 3 atmosphere vacuum distillation facility is mainly supplied from the Ningbo-Shanghai-Nanjing oil pipeline. Due to our ability to obtain crude oil from multiple sources, we are able to meet our normal requirements for crude oil.

Pricing – The price of domestic offshore crude oil is controlled by China National Offshore Oil Corporation (“CNOOC”) and Sinopec Group based on government pricing policies and by reference to the price of the crude oil of the same quality in the international market, while imported crude oil is generally sold to us at prevailing international market prices. The average cost of imported crude oil and domestic offshore crude oil in 2013 was RMB4,758.25 (U.S.$786.01) per ton and RMB5,393.37 (U.S.$ 890.92) per ton, respectively. In 2013, we processed15,635,300 tons of imported crude oil and 32,500 tons of domestic offshore crude oil (including 811,800 tons of crude oil processed on a sub-contract basis).

Until March 2001 the Chinese government implemented a unified pricing system for crude oil. Each month, the National Development and Reform Commission (“NDRC”) would establish an indicative price for each grade of domestic onshore crude oil based on comparable international market prices, inclusive of any duties that would have been imposed had the oil been imported. The actual price for domestic onshore oil would be such indicative price plus a surcharge. This surcharge was determined by China National Petroleum Corporation (“CNPC”) and Sinopec Group to reflect any transportation and other miscellaneous costs that would have been incurred in having the oil delivered to various refineries. Beginning March 2001, the NDRC ceased publishing an indicative price. Instead, the indicative price for domestic onshore oil is calculated and determined directly by CNPC and Sinopec Group based on the principles and methods formerly applied by the NDRC.

On March 26, 2013, the NDRC announced adjustments to the existing refined oil pricing mechanism, which include, among other things, (i) shortening of price reference period from 22 working days to 10 working days; (ii) lifting the 4% downward and upward fluctuation cap on benchmark crude oil prices; and (iii) adjusting the composition of domestic benchmark crude oil types in response to changes of types of imported crude oil and crude oil trading in the overseas market. In the cases of changes such as significant increase in domestic prices or significant fluctuations of crude oil price, the NDRC may issue additional procedural guidelines, such as implementing ad hoc suspension or delay of price adjustment upon the approval by the State Council.

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We purchase crude oil through Sinopec Corp. and its affiliates from the sources selected and in the quantities confirmed by the Company at market prices. On this basis, we believe that changes in crude oil prices should not have a material effect on our competitiveness with other domestic producers. Nevertheless, any increase in the price of crude oil could have an adverse impact on our profitability to the extent that we are unable to pass cost increases on to our customers.

Changes in crude oil prices can affect the Company’s profitability. In 2013, the trend of the world’s oil supply being sufficient to satisfy the world’s demand remained unchanged. International crude oil prices fluctuated at a high level primarily due to geopolitical risks in the Middle East and North Africa, global oversupply of crude oil caused by the development of shale oil gas in North America and market speculation. Because U.S. economic growth was stronger than expected, the demand for oil in America increased in contrast with the trend of falling demand over the past several years, new crude oil transmission pipes were used and many speculators took long position which resulted in the price of West Texas Intermediate (“WTI”) crude oil on the New York Mercantile Exchange increasing as compared with the previous year. In 2013, the average price of WTI crude oil was U.S.$97.94/barrel, representing an increase of 4.06% from U.S.$94.12/barrel in 2012. The price of Brent crude oil on the London Intercontinental Exchange decreased as compared with the previous year due to a stagnant European economy, the declining demand and oversupply of crude oil. In 2013, the average price of Brent crude oil was U.S.$108.64/barrel, representing a decrease of 2.68% from U.S.$111.63/barrel in 2012. In 2013, the average price of crude oil in Dubai was U.S.$105.45/barrel, representing a decrease of 3.00% from U.S.$109.05/barrel in 2012.

For the year ended 31 December 2013 we processed a total of 15,667,800 tons of crude oil (including 811,800 tons of crude oil processed on a sub-contract basis), representing an increase of 4,474,300 tons, or 39.97%, over the previous year. Of the crude oil we processed in 2013, domestic offshore oil accounted for 32,500 tons and imported crude oil accounted for 15,635,300 tons. After the launching of the refinery revamping and expansion project as part of Phase 6 Project in 2012, we enhanced the adaptability of the crude oil and significantly improved the ability to process the relatively low-cost high-sulfur crude oil in 2013. The average unit cost of crude oil processed (by us) was RMB4,819.11/ton (RMB5,224.38/ton in 2012), representing a decrease of 7.76% over the previous year. Our total cost of crude oil processed reached RMB71.593 billion in 2013, representing an increase of 28.91% compared to RMB55.538 billion for the previous year, which represented 69.36% of the total cost of sales.

Coal

Most of the coal used for electricity generation is purchased through a unified system of procurement by Sinopec Corp., and the rest is purchased directly by us from mines. Coal is transported by rail from the mines to Qinhuangdao port and shipped by barge to Jinshanwei where it is delivered to the plant via a wharf and conveyer system. Our cost of coal is primarily dependent on coal price and transportation charges. Although coal may be purchased from alternative sources, railroad transportation must be obtained by allocation from the Chinese government on a monthly basis.

We expect that our total requirement for coal to generate electricity in 2014 will be approximately 2.14 million tons. In 2013, we consumed approximately 2.11 million tons of coal, an increase from 2012 of 0.015 million tons.

Other Raw Materials

We produce most of the raw materials used as feedstock for our operations. If any of these raw materials, other than ethylene, becomes unavailable from internal production, we believe that there are sufficient alternative sources at reasonable prices and the unavailability of raw materials from internal sources will not have a significant effect on our operations and profitability.

We purchase some ancillary raw materials from outside sources. These raw materials include natural gas, MX, methanol, ammonia, sodium hydroxide, sulfur, acetone, acrylonitrile, PTA, propylene and a variety of catalytic agents. In 2013, the total cost of these materials accounted for approximately 12.16% of our total cost of sales. We do not expect any difficulties in obtaining a supply of any of these ancillary raw materials in amounts sufficient to meet our needs in the foreseeable future.

Sales and Marketing

Distribution

The distribution of our fuel products is subject to government regulations. We are required to sell certain refined products to the subsidiaries of Sinopec Group or customers designated by Sinopec Group. Since the second half of 2005, Sinopec Group has executed reforms to its system of selling petrochemical products and implemented what it refers to as a “Five Consolidations” strategy featuring “consolidated marketing strategy, consolidated promotion, consolidated logistics optimization, consolidated sales and consolidated branding”. As a result, the sales of our major petrochemical products are now conducted in a consolidated manner by sales agents designated by Sinopec Group. However, we have the autonomy to decide on the distribution method of our other products in accordance with market conditions. The products we sold in 2013 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 58.55%, 39.35% and 2.10%, respectively, of the total products we sold.

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We generally sell our products to larger trading companies and industrial users with whom we have long-standing relationships, including Sinopec Group or customers designated by Sinopec Group. We believe that the transition to sales of major petrochemical products by agents designated by Sinopec Group will increase our distribution efficiency, reduce horizontal competition and enhance our overall bargaining power, by allowing us to benefit from Sinopec Group’s extensive and highly specialized sales network. It will also allow us to focus more of our resources on reducing production costs and enhancing our technical support.

We use long term contracts to sell most of our products. We did not experience significant write-offs or defaults on our accounts receivable or other trading accounts in 2013. In general we managed to maintain a stable correlation between production and sales in 2013.

Product breakdown

Synthetic Fibers – In 2013, 9.01% of our synthetic fiber products were purchased by provincial and municipal government trading companies that act as intermediaries between us and end-users. No single customer accounted for more than 15.37% of our sales of synthetic fibers in 2013.

Resins and Plastics – In 2013, approximately 4.51% of our resins and plastics sales were to provincial and municipal government trading companies and approximately 62.75% were sold to industrial users. No single customer accounted for more than 3.16% of our sales of resins and plastics in 2013.

Intermediate Petrochemicals – We sell a variety of intermediate petrochemical products, among which the sale volume of petroleum benzene and paraxylene was relatively high in 2013. Secco is the principal outside consumer of our petroleum benzene. In 2013, we sold 178 thousand tons of petroleum benzene to Secco, representing 42.58% of our total 2013 production of such product.

Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation (“Oriental”) are the principal outside consumers of our paraxylene. In 2013, we sold 338 thousand tons and 150 thousand tons of paraxylene, representing 36.02% and 15.97% of our total 2013 production of such product, to Jiaxing Petrochemical Company Limited and Oriental respectively, at prices mutually agreed upon by the relevant parties.

Petroleum Products – In 2013, our primary gasoline and diesel customer was Sinopec Huadong Sales Company Limited.

Trading of Petrochemical Products – In 2013, our primary trading customer for petrochemical products was Sinopec Chemical Commercial Holding Company Limited.

Product Pricing

Most of our products are permitted to be sold at market prices. However, four types of petroleum products (gasoline, diesel and jet fuel, and liquefied petroleum gas) that we sell are subject to varying degrees of government pricing control and are, accordingly, sold at prices set by the Chinese government, which may sometimes be below our costs. In 2011, 2012 and 2013, approximately 36.70%, 40.09% and 49.11% of our net sales were from products subject to price controls. Price controls may apply to these products in various ways. Such price controls are sometimes applied exclusively to our products, exclusively to our competitors’ products or sometimes applied to neither our products nor our competitors’ products. The Chinese government has adopted changes to the pricing mechanism for domestic refined oil to be indirectly aligned with international crude oil prices in a controlled manner through use of certain formula(s).

For products that are not subject to price controls, we set our prices with reference to prices in the major Chinese chemical commodities markets in Shanghai and other parts of China. We also monitor pricing developments in major international commodities markets, particularly in Southeast Asia. In most cases, we revise product prices each month, or more frequently during periods of price volatility. Due to our economies of scale, brand recognition and high quality of products, we believe that we can continue to price our products competitively.

Competition

We compete principally in the Chinese domestic market where 99.83% of our products in volume were sold in 2013. In addition, the limitation in transportation infrastructure in China and the difficulties involved in transporting petrochemical products force companies to compete primarily on a regional basis. In 2013, 94.61% of our net sales were made to customers in Eastern China.

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Our Competitive Advantages

We believe our primary competitive advantages are quality of product, pricing, brand recognition, geographic location and vertical integration. We have received many prizes and awards from both central and local government authorities for high product quality. Furthermore, our location on the outskirts of the densely populated and highly industrialized Shanghai area places us in close proximity to many of our customers. This location also gives us convenient access to ocean transport and inland waterways, which results in a competitive advantage in terms of transportation cost and reliability and punctuality of product delivery.

We believe that our vertical integration in business model represents a significant competitive advantage over non-integrated competitors in China, both in terms of reliability in delivery and price. For most downstream products, our vertical integration results in significant savings on transportation and storage costs which would be incurred by less vertically integrated facilities.

The Domestic Competitive Environment

Prior to 1993, because distribution and pricing of our products were determined in accordance with the State Plan, we did not operate in a competitive environment. With the liberalization of control over pricing and product allocation by the Chinese government, competition in the domestic market has been gradually increasing. At the same time, Chinese private enterprises have gradually overcome technological and funding barriers to extend their business from the downstream processing sector to the upstream petrochemical field. These enterprises have advantages in many areas such as flexibility in operation costs, preferential policy treatment and regional presence, and may use these advantages to compete with us in markets for our products.

Foreign Competition and the World Trade Organization

China joined the WTO on December 11, 2001. As part of its membership commitments, China agreed to eliminate certain tariff and non-tariff barriers to foreign competition in the domestic petrochemical industry that benefited us in the past. In accordance with its WTO commitments, China:

As a result of these measures, we are facing increasing competition from foreign companies and imports. On the other hand,, we think that China’s WTO entry and increasing foreign investments in China have contributed and will continue to contribute to the growth of investment and business in China, resulting in an increase in sales opportunities for us.

Our Competitive Position

In the following discussion, internal consumption of resins and intermediate petrochemicals produced by integrated manufacturers in the production of downstream products are treated as sales.

Synthetic Fibers

In 2013, we had an approximate 0.85% share of total domestic polyester and acrylic consumption while imports had an approximate 3.18% share.

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The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2013.

Sources: Statistics provided to us by Sinopec Group and the China National Council of Textiles.

Intermediate Petrochemicals

In 2013, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 4.65% share of total domestic consumption, while imports had an approximate 25.90% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2013, we were a major producer of ethylene glycol, paraxylene and benzene in China. The following table summarizes the competitive position of our principal intermediate petrochemicals according to domestic sales in 2013.

Petroleum Products

In 2013, we had an approximate 3.05% share of total domestic petroleum products market while imports had an approximate 3.54% share. Although we have one of the largest refining capabilities in China, we use most of our refining capacity to produce feedstock for our own downstream processing of petrochemical products.

The domestic markets for each of our major petroleum products are geographically concentrated because these markets tend to be highly localized with individual producers controlling a large share of the markets in their locality. In 2013, we sold approximately 98.69% of our petroleum products in Eastern China.

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Investments

We established Secco, a Sino-foreign equity joint venture, in late 2001 with BP and Sinopec Corp., primarily to build and operate a 900,000 ton Rated Capacity ethylene petrochemical manufacturing facility. Secco completed construction and commenced its manufacturing operations in 2005. In 2009, Secco had expanded the capacity of certain facilities to 1,090,000 tons of ethylene per annum. We own 20% of the equity interest of Secco. Secco plans to invest in a new acrylonitrile plant project with a capacity of 260,000 tons/year, a new ethylene plant with a new supercharger, a new butadiene plant with a capacity of 90,000 tons/year, and a utility facilities upgrading project. One third of the investment will be funded by the shareholders of Secco through the increase of Secco’s registered capital by U.S.$150,085,618. The Company is obligated to contribute an amount of U.S.$30,017,124 prior to January 24, 2016.

In 2013, Secco achieved a sales revenue of RMB29.370 billion (U.S.$4.852 billion), representing an increase of 8.14% from its sales revenue of RMB27.158 billion (U.S.$4.486 billion) in 2012. The increase of sales revenue was primarily attributable to the relatively high level of operation loads of the manufacturing facilities in 2013, as a result of which both the volume of production and sales increased. Secco produced 1,166.7 thousand tons of ethylene in 2013, representing an increase of 125.8 thousand tons over the previous year, up by 12.08%. Secco achieved a net profit of RMB199.82 million (U.S.$33.008 million) in 2013, as compared to a net loss of RMB349.03 million (U.S.$56.02 million) in 2012. The increase in net profit was primarily due to the fact that although the domestic petrochemicals market continued to be sluggish, Secco was able to generate marginal profit with respect to some of its petrochemical products. In addition, the sales volume increased in 2013. All the above reasons contributed to Secco’s net profit in 2013.

Environmental Protection

We are subject to national and local environmental protection regulations, which currently impose a graduated schedule of fees for the discharge of waste substances, require the payment of fines for pollution and provide for the forced closure of any facility that fails to comply with orders requiring it to cease or cure certain environmentally damaging practices. We have established environmental protection systems which consist of pollution control facilities to treat certain of our waste materials and to safeguard against accidents. Because of the nature of our business, however, we store a significant amount of waste substances in the plants and discharge them into the environment after making such waste substances meet the discharge standards. During 2013, we were assessed a total of RMB38.474 million (U.S.$6.355 million) in fees for discharges of waste substances.

We completed the upgrading of some equipment of the environmental protection facility that supports the continuous polyester testing plant of the Polyester Fiber Research Institute under our Polyester Fiber Department in the second half of 2006, and then commenced the operation of the facility without complying with the required inspection and acceptance procedures for the facility. As a result, we were in breach of the relevant environment regulations of the PRC, and the Environmental Protection Bureau of Jinshan District imposed a fine of RMB80,000 upon us for such breach.

We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2013, the Company continued to carry out various energy-saving and emissions reduction measures in accordance with the relevant domestic energy conservation and emissions reduction requirements, and achieved all energy-saving and emissions reduction goals set by the Chinese government during the year.

In 2013, the Company’s overall energy consumption per RMB10,000 of product value was 0.832 tons of standard coal, representing a decrease of 16.63% compared to 2012. In 2013, the proper disposal ratio of waste water, waste solids and waste gas reached 100%, with a year-on-year decrease of 58.96% in the solid residues disposed of by contractors, a year-on-year decrease of 0.14% in chemical oxygen demand (“COD”), a year-on-year decrease of 5.25% in the emissions of nitrogen oxides, and a year-on-year decrease of 11.51% in the total emissions of ammonia nitrogen. Despite the full operation of the refinery revamping and expansion project as part of the Phase 6 Project, the total emissions of sulphur dioxide were controlled effectively, with only a slight increase of 9.04%. The compliance rate of the discharge of waste water, the disposal rate of hazardous waste and other indicators, in each case, met the relevant environmental protection requirements. The average heat efficiency of the heating furnaces reached 92.24%, an increase of 0.35% over the previous year. In accordance with the requirements set forth by the Shanghai Municipal Government for eliminating obsolete production capacity, the service of No.1 ethylene cracker was halted in November 2013 ahead of schedule. We actively improved the quality of our refined oil products by upgrading our Shanghai V gasoline and China V diesel and supplied the same to the market. In 2013, the Company actively responded to carbon emission trading, securing carbon emission quotas for 2013 through 2015 and consummating its initial carbon emission trading with a volume of 1,000 tons.

Despite of our continuous efforts to protect the environment and save energies, there can be no assurance that Chinese national or local authorities will not impose additional regulations that would require additional expenditures in respect of environmental matters in the future.

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Insurance

We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2013, was approximately RMB37.215 billion (U.S.$6.147 billion) on our property and facilities and approximately RMB3.034 billion (U.S.$0.501 billion) on our inventory. In addition, we maintain insurance policies for such assets as the engineering construction projects and products in transit with third-party’s commercial insurance company. The Sinopec Group insurance coverage is compulsory and applies to all enterprises controlled by Sinopec Group, pursuant to guidelines of Sinopec Group which may not be legally enforceable against Sinopec Group. Thus, there are uncertainties under Chinese law as to what percentage insurance claims we may demand against Sinopec Group.

We do not carry any third party liability insurance to cover claims in respect of personal injury, property or environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. We have not had a third party liability claim filed against us during the last five years. Since business interruption insurance is not customary in China, we do not carry such insurance.

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Government Regulations

Following the development of several major oil fields and a growth in demand for petroleum and petrochemical products in China in the early 1970s, the Chinese government organized petroleum refining and petrochemical production and processing plants into large complexes that would permit integrated production of petroleum products, intermediate petrochemicals, resins and plastics, and synthetic fibers.

Although the Chinese government is liberalizing its control over the petroleum and petrochemical industries in China, significant government regulations that limit the business strategies available to us remain. Central government agencies and their local or provincial level counterparts do not own or directly control our production plants. However, they exercise significant control over the petrochemical industry in areas such as pricing, production quotas, quality standards, allocation of raw materials and finished products, allocation of foreign exchange and Renminbi loans for capital construction projects. The Chinese government’s intentions with respect to the development objectives and policies for the petrochemical industry are stated as part of the Five Year Plans for National Economic and Social Development formulated every five years. These plans at both the national and Shanghai municipality level have identified the petrochemical industry as a “development industry”.

Historically, we were supervised by Sinopec, a ministry-level enterprise under the direct supervision of the State Council, China’s highest administrative body. As a result of a governmental restructuring in 1998, we became subject to the administration of the State Bureau of Petroleum and Chemical Industry. After its functions were terminated in March 2001, we became subject to the administration of the State Economic and Trade Commission. The State Economic and Trade Commission was dissolved in March 2003 and its function in directing the reform and management of state-owned enterprises was assumed by the State-owned Assets Supervision and Administration Commission, its function in industry planning and policy making was assumed by the NDRC, and its functions in administering domestic trade, coordinating and implementing import and export plans of critical industrial products and raw materials were assumed by the Ministry of Commerce. Since then, we have been subject to the industrial oversight of these three governmental agencies at the national level.

As part of this restructuring, Sinopec was also restructured in July 1998. The succeeding entity, Sinopec Group, was authorized to conduct petrochemical business and to control the exploration of crude oil and natural gas and crude oil refining, mainly in the southern and eastern regions of China. China Petroleum and Natural Gas Corporation, another major state-owned petrochemical company, was also restructured, renamed China National Petroleum Corporation and authorized to conduct the same type of business, mainly in the northern and western regions of China. On December 31, 1999, Sinopec Group completed a reorganization pursuant to which certain of its core oil and gas and chemical operations and businesses and related assets and liabilities were transferred to its subsidiary, Sinopec Corp., currently our controlling shareholder.

In addition, based on feedback to our inquiries to Sinopec Group, the controlling shareholder of Sinopec Corp., Sinopec Group, directly or indirectly, engaged in a small amount of business activities in Iran such as providing engineering support and designs. Sales revenue from these business activities accounted for 0.0015% of Sinopec Group’s total unaudited sales revenue in 2013. No profits were generated from these business activities in 2013.

We have no performance obligations under any contract to continue to purchase crude oil sourced from Iran in 2014.

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Sinopec Corp.

We are a member of a group (defined as a parent and all its subsidiaries) for purposes of the disclosure rules of the Securities and Exchange Commission. The parent company of this group is Sinopec Corp., our controlling shareholder. Sinopec Corp. is operated by separate management and from time to time uses its interest as a shareholder to direct our policies and management. We have extracted the following information regarding Sinopec Corp. from its public filings:

Overview

Sinopec Corp. is an integrated petroleum and petrochemical company with upstream, midstream and downstream operations. Based on trading volume in 2013, Sinopec Corp. is one of the largest publicly listed companies in China and one of the largest petroleum and petrochemical companies in both China and Asia. Sinopec Corp. is one of the largest refiners, distributors and marketers of gasoline, diesel, jet fuel and most other major refined products in China and Asia with principal markets in the eastern and southern regions of China. Sinopec Corp. is also a producer and distributor of petrochemicals in China and additionally explores, develops and produces crude oil and natural gas principally to supply its refining and chemical operations.

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