By staff reporter Wang Zhen

The Shanghai Stock Exchange opened mixed Tuesday as the composite index rose to 3600, after gaining 4.45 percent Monday, before slipping later in the morning on investor uncertainty over the refined oil and metals sectors.

Shares of refined oil and chemicals giant Sinopec (SHSE: 600028, HKSE: 0386) fell more than 3 percent early Tuesday, reversing a 4.25 percent gain influenced by Monday's release of an annual report that said its earnings increased 5.5 percent in 2007.

In Hong Kong, the Hang Seng Index fell to 24428.22 Tuesday morning, down 0.61 percent from Monday's close. Shares in Hong Kong began the week higher credited to investor optimism.

Analysts said Monday's rebounds on the Chinese markets came as no surprise but did not erase high risks in the refinery and metal sectors.

Sinopec shares rose to 12.99 yuan Monday after the company announced net profits rose to 56.5 billion yuan in 2007, below market expectations of 61.2 billion yuan. Another oil major, Petrochina's listed subsidiary CNPC (SHSE: 601857), closed higher Monday at 18.35 yuan, up 4.56 percent from Friday's close.

A week earlier, a JP Morgan equity research report predicted Sinopec's 2007 earnings would increase 5 percent. But the securities firm cut its 2008 and '09 earnings estimates for the company by 26 percent to 58 billion yuan and 19 percent to 65 billion yuan, respectively, mainly due to government procrastination over setting higher oil product prices.

Price has been a key issue amid higher world crude prices and inflation concerns in China. JP Morgan said “the chance of Chinese government deregulating domestic gasoline and diesel selling prices is very small in FY '08.”

Vincent Chen, chief China market analyst with Credit Suisse, told Caijing that, despite Sinopec's modest earnings, the company's stock rose Monday as part of a broader market rally. “The prosperity of refineries is not clear as we do not know when the government will deregulate domestic gasoline and diesel prices,” said Chen.

Gui Haoming, an analyst with the securities firm Shenyin Wanguo, told Caijing the long term performance of petrochemical stocks will be determined by state policy. Sinopec is already getting government help, having received in 2007 some 4.9 billion yuan in government subsidies for its refining business.

“As long as the government does not lift the cap on gasoline prices, the performance of the industry is not going to be positive,” he said.

Meanwhile, the metals sector continued last week's momentum of growth. Stocks were led by Aluminum Corp. of China (SHSE: 601600, HKSE: 2600), Jiangxi Copper (SHSE: 600362), and West Mining (SHSE: 601168), each of which advanced more than 10 percent from the previous trading day.

Despite the rebound, Chen said, the metals sector is still under great pressure. “Enterprises in the metals sector are under great pressure for yields in 2008, especially those with no metal resources.” According to China industrial data released a few months ago, the metals sector is listed among the worst sectors for performance.

In contrast, Gui offered a positive forecast for the metals sector as “consumption season draws near and demand rises.” But he worried that recent share price increases may have been excessive, leaving a door open to future fluctuations.

Market analysts think a recovery on the A-share market may continue throughout this week, but chances for any dramatic changes are limited. Chen noted the latest rally was “no surprise,” adding that overall stock performance will drop from last year as slower economic growth crimps earnings.

 “I only worry that domestic analysts are too optimistic about A shares,” said Chen.

1 yuan = 14 U.S. cents

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