UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

OR

For the fiscal year ended December 31, 20142015

OR

OR

Date of event requiring this shell company report                     

For the transition period from                      to

Commission file number 1-12158

(Exact name of Registrant as specified in its charter)

Sinopec Shanghai Petrochemical Company Limited

(Translation of Registrant’s name into English)

The People’s Republic of China

(Jurisdiction of incorporation or organization)

No. 48 Jinyi Road, Jinshan District, Shanghai, PRC 200540

(Address of principal executive offices)

Mr. Tang WeizhongZhang Jianbo

No. 48 Jinyi Road, Jinshan District, Shanghai, 200540

The People’s Republic of China

Tel: +86 (21) 57943143

Fax: +86 (21) 57940050

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

3,495,000,000 H Shares, par value RMB1.00 per Share

7,305,000,000 domestic shares, par value RMB1.00 per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15) (d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x                Accelerated Filer  ¨                Non-Accelerated Filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).    Yes  ¨    No  x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

Table of Contents

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words such as “believe”, “intend”, “expect”, “anticipate”, “project”, “estimate”, “predict”, “plan” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements address, among others, such issues as:

These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in “Item 3. Key Information — Risk Factors” and the following:

Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements should be considered in light of the various important factors set forth above and elsewhere in this annual report.report, including the risks set forth in “Item 3. Key Information – Risk Factors.”. In addition, we cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

EXCHANGE RATES

Unless otherwise specified, references in this annual report to “U.S. Dollars” or “U.S.$” are to United States Dollars, references to “HK dollars” or “HK$” are to Hong Kong dollars and references to “Renminbi” or “RMB” are to Renminbi yuan, the legal tender currency of the PRC.

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to U.S. Dollars have been made at a rate of RMB6.2046RMB6.4778 to U.S. $1.00,$1.00, the noon buying rate on December 31, 20142015 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We do not represent that Renminbi or U.S. dollar amounts could be converted into U.S. Dollars or Renminbi, as the case may be, at any particular rate.

ii

CERTAIN TERMS AND CONVENTIONS

References to “we” or “us” or “Company” are references to Sinopec Shanghai Petrochemical Company Limited and our subsidiaries, unless the context requires otherwise. Before our formation, these references relate to the petrochemical businesses carried on by the Complex.

References to “Sinopec Corp.” are references to China Petroleum & Chemical Corporation, the controlling shareholder of the Company.

References to the “Sinopec Group” are references to China Petrochemical Corporation, the controlling company of Sinopec Corp.

References to the “Complex” are references to Shanghai Petrochemical Complex, our predecessor founded in 1972.

References to “China” or the “PRC” are references to The People’s Republic of China which, for the purpose of this annual report and for geographical reference only, excludes Hong Kong, Macau and Taiwan.

References to “ADSs” are references to our American Depositary Shares, which are listed and traded on the New York Stock Exchange. Each ADS represents 100 H Shares.

References to our “domestic shares” are references to 7,305,000,000 domestic shares of the Company, par value RMB1.00 per share, which are ordinary shares held by Chinese investors.

References to our “H Shares” are references to our overseas-listed foreign ordinary shares, par value RMB1.00 per share, which are listed and traded on the Stock Exchange of Hong Kong Limited (“HKSE”) under the number “338”.

“Rated Capacity” is the output capacity of a given production plant or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that the production plant is expected to operate, including downtime for regular maintenance, and multiplying that number by an amount equal to the plant optimal daily output or throughput, as the case may be.

All references to “tons” are to metric tons.

Unless otherwise noted, references to sales volume are to sales to entities other than us or our divisions and subsidiaries.

iii

PART I

Not applicable.

Not applicable.

A. Selected Financial Data.

Our selected consolidated statements of operations data (except for ADS data) and cash flows data for each of the years ended December 31, 2012, 2013, 2014 and 20142015 and our selected consolidated balance sheets data as of December 31, 20132014 and 20142015 are derived from our consolidated financial statements included inItem 17.18. Financial Statements. Our selected consolidated statements of operations data and cash flows data for the years ended December 31, 20102011 and 20112012 and our consolidated balance sheets data as of December 31, 2010, 2011, 2012 and 20122013 are derived from our consolidated financial statements not included in this annual report. Our selected consolidated financial data should be read in conjunction with our consolidated financial statements, and the notes thereto, andItem 5. Operating and Financial Review and Prospects. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board.

Selected Consolidated Financial Data

(in thousands, except per share and per ADS data)

		Years Ended December 31
		2010 (RMB)				2011 (RMB)				2012 (RMB)				2013 (RMB)				2014 (RMB)
CONSOLIDATED STATEMENTS OF CASH FLOWS DATA
Net cash (used in)/generated from operating activities			3,973,719				2,219,994				(2,066,385	)			5,098,538				3,662,408
Capital expenditure			(1,356,845	)			(3,481,235	)			(4,259,859	)			(1,323,137	)			(1,089,268	)
Net proceeds/(repayment) related to corporate bonds			—				(1,000,000	)			—				—				—
Proceeds from borrowings			39,355,780				35,106,127				53,365,372				55,037,612				51,385,298
Repayments of borrowings			(42,631,344	)			(32,791,261	)			(46,779,614	)			(59,155,947	)			(53,444,473	)

		Years Ended December 31
		2011 (RMB)				2012 (RMB)				2013 (RMB)				2014 (RMB)				2015 (RMB)
CONSOLIDATED STATEMENTS OF CASH FLOWS DATA
Net cash (used in)/generated from operating activities			2,219,994				(2,066,385	)			5,098,538				3,662,408				4,932,824
Capital expenditure			(3,481,235	)			(4,259,859	)			(1,323,137	)			(1,089,268	)			(695,277	)
Net proceeds/(repayment) related to corporate bonds			(1,000,000	)			—				—				—				—
Proceeds from borrowings			35,106,127				53,365,372				55,037,612				51,385,298				31,999,758
Repayments of borrowings			(32,791,261	)			(46,779,614	)			(59,155,947	)			(53,444,473	)			(35,684,713	)
		As of December 31
		2011 (RMB)				2012 (RMB)				2013 (RMB)				2014 (RMB)				2015 (RMB)
CONSOLIDATED BALANCE SHEETS DATA
Current assets			9,665,814				12,891,424				14,486,028				9,510,415				8,143,980
Property, plant and equipment			12,501,980				17,468,748				16,669,479				15,541,575				14,383,319
Total assets			30,718,865				36,462,546				36,636,810				30,905,632				27,820,591
Short term borrowings (a)			5,512,074				11,023,877				7,094,026				4,078,195				2,070,000
Current liabilities			12,271,832				18,927,257				18,017,454				12,484,849				7,726,271
Long term borrowings (excluding current portion)			160,050				1,231,340				627,800				1,632,680				—
Total equity attributable to owners of the Company			17,925,563				16,037,166				17,732,494				16,500,272				19,797,282

Dividends

The following table sets forth certain information concerning the dividends of the Company since January 1, 1994:2011:

See alsoItem 8. Financial Information – A. Consolidated Statements and Other Financial Information – Dividend Policy.

Exchange Rates

The Chinese government controls its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. SeeItem 10. Additional Information – D. Exchange Controls.

The following table sets forth information concerning exchangethe high and low noon buying rates between Renminbi and U.S. Dollars for each month during the periods indicated:previous six months and the most recent practicable date:

Source: The sourcesfollowing table sets forth the average noon buying rates between Renminbi and U.S. dollars for each of the exchange rates are the H.10 statistical release of the Federal Reserve Board.

Note: (1) Determined2011, 2012, 2013, 2014 and 2015, calculated by averaging the noon buying rates on the last business day of each month during the respective period.relevant year:

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

D. Risk Factors.

An investment in our ADSs involves significant risks. The risks and uncertainties described below are not the only ones we face. You should consider carefully all of the information in this annual report, including the risks and uncertainties described below and our consolidated financial statements and related notes, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Our operations may be adversely affected by the cyclical nature of the petroleum and petrochemical market and by the volatility of prices of crude oil and petrochemical products.

Most of our revenues are attributable to the sale of refined oil and petrochemical products, which have historically been cyclical and sensitive to the availability and price of raw materials and general economic conditions. Markets for many of our products are sensitive to changes in industry capacity and output levels, changes in regional and global economic conditions, the price and availability of substitute products and changes in consumer demand, which from time to time have had a significant impact on our product prices in the regional and global markets. Due to the decrease in tariff charges, the removal of other restrictions on importation and the Chinese government’s gradual relaxation of its control of the allocation of products and pricing, many of our products have become increasingly vulnerable to the cyclical nature of regional and global petroleum and petrochemical markets, which may adversely affect our operations.

We consume large amounts of crude oil to manufacture our products of which more than 90% is typically imported. In 2014,2015, crude oil costs accounted for RMB59.56RMB32.391 billion, or 64.11%51.61% of our annual cost of sales. As a result, changes in crude oil prices can affect our profitability. In recent years, due to various reasons, the price of crude oil has fluctuated significantly. We cannot rule out the possibility of the occurrence of certain global emergencies which might disrupt our crude oil supply. We expect that the volatility and uncertainty of the prices of crude oil and petrochemical products will continue, and that increasing crude oil prices and declines in prices of petrochemical products may adversely affect our business and results of operations and financial condition.

Some of our major products are subject to government price controls, and we are not able to pass on all cost increases from rising crude oil prices through higher product prices.

We consume large amounts of crude oil to manufacture our products of which more than 90% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on market conditions and government regulations. Given that the increase of the sales prices of our products may lag behind the increase of crude oil costs, we may fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products. In particular, gasoline, diesel and jet fuel, and liquefied petroleum gas are subject to government price controls at present. In 2012, 2013, 2014 and 2014,2015 approximately 40.09%49.11%, 49.11%48.02% and 48.02%40.81% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (seeItem 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increasing the sale prices of our products, which has had and will possibly continue to have a material adverse effect on our financial condition, results of operations and cash flows.

Our development and operation plans have significant capital expenditure and financing requirements, which are subject to a number of risks and uncertainties.

The petrochemical business is a capital intensive business. Our ability to maintain and increase our revenues, net income and cash flows depends upon continued capital spending. Our current business strategy contemplates capital expenditure for 20152016 of approximately RMB1.6 billionRMB1,700 million (U.S.$258264.43 million), which will be provided through financing activities and use of our own capital. Our actual capital expenditures may vary significantly from these planned amounts, subject to our ability to generate sufficient cash flows from operations, investments and other factors that may be beyond our control. In addition, there can be no assurance as to whether, or at what cost, our capital projects will be completed or the success of these projects if completed.

As of March 31, 2015,2016, we had an aggregate outstanding indebtedness of approximately RMB6,977.2RMB1,213 million (U.S.$ 1,124.5192.9 million). Most of our borrowings are with state-controlled banks in China and structured as short term debt obligations with payment due in one year or less. These banks have generally been willing to provide new short term loans while we pay off existing loans. Sinopec Corp., our controlling shareholder, did not provide any guarantee or credit support for our debt for the year ended December 31, 20142015 and for the three-month period ended March 31, 2015.2016.

Our ability to obtain external financing in the future and our ability to make timely repayments of our debt obligations are subject to a variety of uncertainties, including: our future results of operations, financial condition and cash flows; the condition of the economy in China and the condition of markets for our products; the cost of financing and the condition of financial markets; the issuance of relevant government approvals and other project risks associated with the development of infrastructure in China; and the continuing willingness of banks to provide new loans as we pay down existing debt.

While we anticipate that we will rely less on borrowings to finance capital expenditures and operations, as the global economic outlook continues to improve, our business, results of operations and financial condition could be adversely affected if we fail to obtain sufficient funding for our operations or development plans.

We could face increasing competition.

Our principal market, Eastern China, which is comprised of Shanghai, Shandong, Jiangsu, Anhui, Zhejiang, Jiangxi and Fujian, has enjoyed stronger economic growth and a higher demand for petrochemical products than other regions of China. As a result, we believe that our competitors will try to expand their sales and build up their distribution networks in our principal market. We believe this will have an adverse impact on the production and sale of our major products. Moreover, 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 treatments and regional presence, and may use these advantages to compete with us in our target market.

We are controlled by Sinopec Corp., whose interests may not be aligned with yours.

As of March 31, 2015,2016, Sinopec Corp. owned 50.56% of our shares. Accordingly, it has voting and management control over us, and its interests may be different from the interests of our other shareholders. Subject to our Articles of Association and applicable laws and regulations, Sinopec Corp. will be in a position to cause us to declare dividends, determine the outcome of corporate actions requiring shareholder approval or effect corporate transactions without the approval of the holders of the H shares and ADSs. Any such increase in our dividend payout would reduce funds available for reinvestment in our business and any such actions or transactions could adversely affect us or our minority shareholders. Sinopec Corp. may also experience changes in its own business strategy and policies. Although we are not currently aware of any specific changes, they could, in turn, lead Sinopec Corp. to change its policies or practices toward us in ways that we cannot predict, with corresponding unpredictable consequences for our business. Additionally, Sinopec Corp. may leverage its controlling shareholder position to influence our decisions with regard to the manufacturing and operation, allocation of financial resources and appointment and removal of senior management members, which could adversely affect us or our minority shareholders.

We have also engaged from time to time and will continue to engage in a variety of transactions with Sinopec Corp., Sinopec Group, the controlling company of Sinopec Corp., and their various subsidiaries or affiliates which provide a number of services to us, including the supply of raw materials, product distribution and sales agency, project design and installment service, petrochemical industry related insurance and financial services. We also sell oil and petrochemical products to Sinopec Corp. and its affiliates. Our transactions with these companies are governed by a Mutual Product Supply and Sales Services Framework Agreement with Sinopec Corp. and a Comprehensive Services Framework Agreement with Sinopec Group, the terms of which were negotiated on an arm’s length basis. SeeItem 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions. Our business and results of operations could be adversely affected if Sinopec Corp. or Sinopec Group refuses to engage in such transactions or if it seeks to amend the contracts between the parties in a way adverse to us. In addition, Sinopec Corp. has interests in businesses which compete or are likely to compete, either directly or indirectly, with our businesses. Because Sinopec Corp. is our controlling shareholder and its interests may conflict with our own interests, Sinopec Corp. may take actions that favor itself over our interests.

Our business operations may be adversely affected by present or future environmental regulations.

We are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:

Our production operations produce substantial amounts of waste materials (i.e., waste water, waste gas and waste residue). In addition, our production and operations require permits that are subject to renewal, modification and revocation. In February 2014, the Environmental Protection Bureau of Jinshan District imposed a fine of RMB80,000 on us because we commenced the operation of the environmental protection facility that supports the continuous polyester testing plant of the Polyester Fiber Research Institute under our Polyester Fiber Department without complying with the required inspection and acceptance procedures for the facility after we completed the upgrading of some of its equipment in 2006. SeeItem 4. Information of the Company – B. Business Overview – Environmental Protection. At present, we believe that our operations substantially comply with all applicable Chinese environmental laws and regulations as they have been previously interpreted and enforced. The Chinese government (including the local governments), however, has moved, and may move further, toward the adoption of more regulations and more stringent environmental standards. Chinese national or local authorities may also apply more rigorous enforcement of such regulations which would require us to incur additional expenditures on environmental matters.

Our operations are exposed to risks relating to operating hazards and production safety and we have limited insurance coverage for resulting losses.

Our operations involve the handling and storage of explosives and other hazardous articles. In addition, our operations involve the use of heavy machinery, which involves inherent risks that cannot be entirely eliminated through our preventive efforts. As a result, we may encounter fires, explosions and other unexpected incidents during our operations, which may cause personal injuries or death, property damage, environmental damage, interruption of operations and reputational damages to us. Each of such incidents could have a material adverse impact on our financial condition and results of operations.

We maintain a package of insurance coverage plan through Sinopec Group on our property, facilities and inventory. In addition, we maintain insurance policies for such assets as the engineering construction projects and products in transit with third-party commercial insurance companies. We do not carry anya third party liability insurance with a coverage capped at RMB50 million to cover claims, subject to deductibles, 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. Our insurance coverage may not be sufficient to cover all the financial losses caused by operating hazards. Resulting losses required to be compensated or otherwise paid for by us due to such operating hazards that are not fully insured against may have a material adverse effect on our financial condition and results of operations.

Our business may be limited or adversely affected by government regulations.

The Chinese central and local governments continue to exercise a certain degree of control over the petrochemical industry in China by, among other things:

As a result, we may face significant constraints on our flexibility and ability to expand our business operations or to maximize our profitability. In the past, we have benefited from favorable regulatory policies that have, for example, reduced the competition we face from illegal imports of petroleum products. Existing policies that favor our industry may change in the future and our business could be adversely affected by any such changes.

Our development plans may require regulatory approval.

We are currently engaged in a number of construction and expansion projects. Most of our projects are subject to governmental review and approval. The timing and cost of completion of these projects will depend on numerous factors, including approvals from relevant government authorities and general economic conditions in China.

While in general we attempt to obtain governmental approval as far in advance as practicable, we are unable to predict the timing and outcome of these governmental reviews and approvals. If any of our important projects required for our future growth are not approved, or not approved on a timely basis, our results of operations and financial condition could be adversely affected.

We face increasing foreign competition in our lines of business.

China joined the WTO on December 11, 2001 and had committed to eliminate some tariff and non-tariff barriers to foreign competition in the domestic petrochemical industry that benefited us in the past. In particular, China:

As a result of these measures, we face increasing competition from foreign companies and imports. In 2015,2016, we expect the world economy to recover slowly and the growth in the petrochemical industry to remain sluggish. In addition, competition for our products has increased, as many overseas companies have switched their focus to sales in China. Furthermore, tariff reductions could reduce our profit margins or otherwise negatively impact our revenue from certain products, including a small number of significant products. The Chinese government may also reduce the tariffs imposed on production equipment that we may import in the future.

PoliticalChanges in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

Substantially all of our operations are conducted in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic policiesand social conditions in China could affect our businessgenerally and by continued economic growth in unpredictable ways.China as a whole.

The Chinese economy of China differs from the economies of most developed countries belonging toin many respects, including the Organization for Economic Co-operation and Development in a numberamount of respects, including:

Before its adoption of reform and open-door policies beginning in 1978, China was primarily a planned economy. Since that time, Although the Chinese government has been reformingimplemented measures emphasizing the Chineseutilization of market forces for economic system,reform, the reduction of state ownership of productive assets and has also begun reforming its government structure. These reforms have resultedthe establishment of improved corporate governance in significant economic growth and social progress. Although the Chinese government still ownsbusiness enterprises, a significantsubstantial portion of the productive assets in China economic reform policies sinceis still owned by the late 1980s have emphasized greater autonomy for state-owned or controlled enterprises, the development of private enterprises and the utilization of market mechanisms. We expect thatgovernment. In addition, the Chinese government will continuecontinues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these reforms, further reduce government intervention and rely more heavily on market mechanisms to allocate resources. Although we believe these reforms willmeasures may benefit the overall Chinese economy, but may have a positivenegative effect on us. Our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the Chinese government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our overall long term development, we cannot predict whether changes to China’s political, economicproducts and social conditions, laws, regulationsservices and policies will have any adverse effect onmaterially and adversely affect our current or future business orand results of operations.

If the Chinese government changes current regulations that allow us to make payments in foreign currencies, we may be unable to obtain the foreign currency necessary for our business.

The Renminbi currently is not a freely convertible currency. We receive most of our revenue in Renminbi. A portion of our Renminbi revenue must be converted into other currencies to meet our foreign currency obligations. We have substantial requirements for foreign currencies, including:

Under existing foreign exchange regulations in China, we may undertake current account foreign exchange transactions, including the payment of dividends, without prior approval from the State Administration of Foreign Exchange (“SAFE”) by producing commercial documents evidencing the foreign exchange transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The Chinese government has stated publicly that it intends to eventually make the Renminbi freely convertible. However, uncertainty exists as to whether the Chinese government may restrict access to foreign currency for current account transactions if foreign currency becomes scarce in China.

Foreign exchange transactions under the capital account (international revenues and expenditures that increase or decrease debt or equity, including principal payments in respect of foreign currency-denominated obligations) continue to be subject to limitations and require the prior approval of the SAFE. These limitations could affect our ability to obtain foreign exchange through debt financing, or to make capital expenditures in foreign currency.

If the Chinese government restricts our ability to make payments in foreign currency, we may be unable to obtain the foreign currency necessary for our business. In that case, our business may be materially adversely affected, and we may default on our obligations.

The change of currency policy and the fluctuation of Renminbi might adversely affect our business and operating results.

The exchange rate between the Renminbi and the U.S. Dollar or other foreign currencies might fluctuate and be affected by the change in ChineseChina’s political and economic conditions. Inconditions and China’s foreign exchange policies. On July 21, 2005, the ChinesePRC government changed its decade-old policy of pegging the Renminbivalue of the RMB to the U.S. Dollar. Underdollar, and the newRMB appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China, or the PBOC, regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the Renminbi is permitted to fluctuateperiod between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow and managed bandrange. However, the RMB fluctuated significantly during that period against a basket of certain foreign currencies.other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the adoption of this new policy, the value of the RenminbiRMB has fluctuated daily within a narrow bandstarted to slowly appreciate against the U.S. Dollar. Nevertheless,dollar, though there have been periods when the Chinese government continuesU.S. dollar has appreciated against the RMB. On August 11, 2015, the PBOC allowed the RMB to receivedepreciate by approximately 2% against the U.S. dollar. It is difficult to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again. There remains significant international pressurespressure on the PRC government to further liberalize itsadopt a flexible currency policy which could result in China adjusting its currency policy further.policy.

A small portion of our cash and cash equivalents is denominated in foreign currencies (including the U.S. Dollar). The appreciation in the value of Renminbi against foreign currencies (including the U.S. Dollar) may cause a decrease in the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies. In addition, the appreciation of Renminbi may harm the exports of our downstream manufacturers, thus adversely affecting the market demand for our products.

As most of our revenue is denominated in Renminbi, and most of our purchase of crude oil and some equipment and repayments of certain borrowings are made in foreign currencies, any depreciation of the Renminbi would increase our cost and adversely affect our capacity of making profits. In addition, any depreciation of the Renminbi could adversely affect the value of the dividends of our H shares and ADSs, which we declare in Renminbi and pay in foreign currencies.

Interpretation and enforcement of Chinese laws and regulations is uncertain.

The Chinese legal system is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority, but do not have the binding effect of precedents. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. Because these laws, regulations and legal requirements are relatively new or otherwise undeveloped and not all accessible to the public and because prior court decisions have little precedential value, the interpretation and enforcement of these laws, regulations and legal requirements involve greater uncertainty than in other jurisdictions.

You may not enjoy shareholders’ protections that you would be entitled to in other jurisdictions.

As most of our business is conducted in China, our operations are governed principally by the laws of China. Despite the continuing improvement of the PRC Company Law and Securities Law, Chinese legal provisions for the protection of shareholders’ rights and access to information are different from those applicable to companies formed in the United States, Hong Kong, the United Moreover, there are significant differences between our corporate governance practices and those of U.S. issuers listed on the NYSE, as further described under “Item 16 G. Corporate Governance.” Kingdom and other developed countries or regions. You may not enjoy shareholders’ protections under Chinese law that you would be entitled to in other jurisdictions.

Our Articles of Association require you to submit your disputes with us and other persons defined by our Articles of Association regarding the Company’s affairs to arbitration. You will have no legal right to a court proceeding with respect to such disputes.

Our Articles of Association require holders of our H shares or ADSs having a claim against, or a dispute with, us, our directors, supervisors, executive officers or a holder of our domestic shares relating to any rights or obligations conferred or imposed by our Articles of Association, the Chinese Company Law or other relevant Chinese laws or regulations relating to our affairs, to submit such claim or dispute to arbitration with the China International Economic and Trade Arbitration Commission or to the Hong Kong International Arbitration Center. Our Articles of Association further provide that any arbitration decisions with respect to such disputes or claims shall be final and binding on all parties. As a result, you will have no legal right to a court proceeding with respect to such disputes.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the applicable professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to regularly evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB.

Proceedings instituted recently by the SEC against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC brought administrative proceedings against the Big Four accounting firms, including our independent registered public accounting firm, in China, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision, or Initial Decision, was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The accounting firms filed a petition for review of the Initial Decision to the SEC. On February 6, 2015, the Big Four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If future document productions fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. While we cannot predict if the SEC will further review the four China-based accounting firms’ compliance with specified criteria or if the results of such a review would result in the SEC imposing penalties such as suspensions or restarting the administrative proceedings, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the delisting of our ADSs from the New York Stock Exchange or the termination of the registration of our H shares under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. We do not expect to be a PFIC for our current taxable year. However, since PFIC status depends on the composition of our income and the composition and value of our assets from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, U.S. investors may suffer adverse tax consequences, including increased U.S. tax liabilities and reporting requirements. For further discussion of the adverse U.S. federal income tax consequences of our possible classification as a PFIC, seeItem 10. Additional Information – E. Taxation – U.S. Taxation.

We have in the past sourced a small portion of crude oil from Iran that may be targeted by economic sanctions under relevant U.S. laws, and if such activities are determined by the U.S. governmental authorities as sanctionable activities, we could be sanctioned or otherwise penalized.

The United States has adopted a number of measures since 1996 that provide for the possible imposition of sanctions against non-U.S. companies engaged in certain activities in and with Iran in the energy and other sectors, including Executive Orders 13622 (effective July 31, 2012)2012 and revoked January 16, 2016), 13628 (effective October 9, 2012), and 13645 (effective July 1, 2013)2013 and revoked January 16, 2016), the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”) enacted August 10, 2012 and the Iran Freedom and Counter-Proliferation Act (“IFCA”) enacted January 2, 2013. The sanctionable activities include certain investments, the provision of goods, services, technology, or support that could contribute to the development of petroleum and petrochemical resources or the production of refined petroleum products in Iran, the exportation of refined petroleum products to Iran, the transportation of crude oil from Iran, or the engagement in a significant transaction for the purchase or acquisition of petroleum or petroleum products from Iran, and the engagement in transactions with certain Iranian specially designated nationals and blocked persons (“SDNs”) as identified and published by U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, the agency primarily responsible for administering U.S. sanctions and embargoes.

We have sourced a small portion of our crude oil from Iran in the past through Sinopec Corp., our current controlling shareholder, and independent third parties, and we may continue to purchase crude oil from Iran. In addition, Sinopec Corp. and Sinopec Group, the controlling shareholder of Sinopec Corp., have engaged in operations in or purchasing crude oil sourced from Iran and may continue to do so in the future. We have no control over the activities of Sinopec Group or Sinopec Corp. in connection with any activities that they may conduct in Iran.

If our purchases of crude oil from Iran and transactions related thereto are determined to be sanctionable activities by the U.S. President and/or the relevant U.S. governmental authorities, we may be subject to five or more of the twelve sanctions options available under the Iran Sanctions Act of 1996 (as amended) (“ISA”) and the ITRSHRA, which include restrictions on bank financing, outright blocking of the Company’s property within U.S. jurisdiction, under the control of U.S. persons anywhere in the world, and prohibition of U.S. persons from investing or purchasing a significant amount of equity or debt instruments of the Company. Similar sanctions may also be imposed under the Executive Orders cited above, the IFCA, and other U.S. laws. In addition, many states in the United States have adopted legislation requiring state pension funds to divest themselves of securities in any company with active business operations in Iran. We cannot assure that we or any of our affiliates will not be sanctioned by the U.S. President and/or the relevant U.S. governmental authorities in light of the activities by us or our affiliates in Iran. The imposition of any such sanctions on us or our affiliates will have a negative impact on our business, reputation or stock price. In addition, purchase of crude oil by Sinopec Corp. subsidiaries that supply us with raw materials may from time to time be sourced from National Iranian Oil Company. This entity has been identified by the U.S. government as an SDN and sanctioned under various laws, including for assisting the government of Iran to avoid sanction and for engaging in activities related to nuclear proliferation. Under Executive Order 13645, the U.S. President can sanction non-U.S. companies that engage in transactions with SDNs such as the National Iranian Oil Company. To the extent we indirectly (or directly) purchase raw materials from this entity, we risk potential U.S. government sanctions. Even absent any U.S. government sanctions, we risk adverse publicity in the world markets, which may impair our reputation and business.

Sinopec Group, the controlling shareholder of Sinopec Corp. which is our current controlling shareholder, or its affiliates’ current or future activities in certain countries are the subject of economic sanctions under relevant U.S. laws and could result in negative media and investor attention to us and possible imposition of sanctions on Sinopec Group, which could materially and adversely affect our shareholders.

Sinopec Group undertakes, from time to time and without our involvement, overseas investments and operations in the oil and gas industry, including the exploration and production of oil and gas, refining and Liquefied Natural Gas, or LNG, projects. Sinopec Group’s overseas asset portfolio includes oil and gas development projects in Iran, Sudan and Syria, countries subject to U.S. sanctions and embargoes. We cannot predict the interpretation or implementation of government policy at the U.S. federal, state or local levels with respect to any current or future activities by Sinopec Group or its affiliates in countries or with individuals or entities that are the subject of U.S. sanctions. Similarly, we cannot predict whether U.S. sanctions will be further tightened, or the impact that such actions may have on Sinopec Group. It is possible that the United States could subject Sinopec Group to sanctions due to these activities. Certain U.S. state and local governments and colleges have restrictions on the investment of public funds or endowment funds, respectively, in companies that are members of corporate groups with activities in certain countries that are the subject of U.S. sanctions. These investors may not wish to invest, and may divest their investment, in us because of our relationship with Sinopec Group and its investments and activities in those U.S. government sanctioned countries. It is possible that, as a result of activities by Sinopec Group or its affiliates in countries that are the subject of U.S. sanctions, we may be subject to negative media or investor attention, which may distract management, consume internal resources and affect investors’ perception of our company.

Further, the ISA authorizes the imposition of sanctions on companies that engage in certain activities in and with Iran, especially in Iran’s energy sector. It is possible that Sinopec Group or its affiliates engage in activities that are targeted for sanction purposes by the ISA or other U.S. laws. If the U.S. President determines that Sinopec Group or one of its affiliates in fact engaged in the targeted activities, he would be required under the ISA to impose on Sinopec Group or its affiliates at least five sanctions from among twelve sanctions options available under the ISA, which range from restrictions on U.S. exports or bank financing to outright blocking of Sinopec Group or its affiliate’s property within the U.S. or in the possession or control of U.S. persons anywhere in the world. In addition, the IFCA requires the U.S. President to block the property of persons and entities within U.S. jurisdiction or control of U.S. persons if he determines that, among other things, such persons or entities are engaged in certain transactions involving the energy, shipping or shipbuilding sectors of Iran or with certain SDNs. It also requires the U.S. President to impose five or more sanctions under the ISA on a person that he determines has knowingly, on or after July 1, 2013, sold, supplied or transferred to or from Iran precious metals or certain other materials (including graphite, aluminum, steel, coal and certain software) if used for specified purposes. If the U.S. President determines that Sinopec Group, or an entity it owns or controls, had engaged in any such activities and if the most extreme sanction under the ISA or other U.S. sanctions laws, blocking, were applied to Sinopec Group’s property, including controlled subsidiaries, Sinopec Group could be prohibited from engaging in business activities in the United States or with U.S. individuals or entities, and U.S. transactions in our securities and distributions to U.S. individuals and entities with respect to our securities could also be prohibited.

In addition, pursuant to the IFCA, Executive Order 13645 and other U.S. laws, the U.S. government can sanction financial institutions anywhere in the world that engage in certain Iran related transactions. Such sanctions include prohibiting the financial institution from opening, or imposing strict conditions on maintaining, a correspondent or payable through account in the United States. The potential for financial institutions to be sanctioned for Iran related activities may impact our ability to engage in financial transactions related to our Iran transactions. Although many of the sanctions discussed above were terminated on January 16, 2016 pursuant to the commitments of the United States under Joint Comprehensive Plan of Action, such termination would not affect sanctionable activities occurring prior to that date.

The trading prices of our ADSs and H Shares have been volatile and may continue to be volatile regardless of our operating performance.

The trading prices of our ADSs and H Shares have been and may continue to be subject to wide fluctuations. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:

In addition, the stock market in general, and the market prices for companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our ADSs.

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 the project 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 further enhanced its oil refining process and strengthened and expanded the Company’s core businesses while continuing to explore the development of fine chemicals and products with high value added. SeeItem 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 (“Sinopec Group”). 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.

Our H Shares were listedcommenced listing 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 was used to fund the issue of 3.36 new bonus shares with respect to every 10 issued and outstanding shares, the surplus reserve was 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 was 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 reached, as of December 4, 2013, 7,305,000,000, and the total amount of H Shares of the Company reached 3,495,000,000. Therefore, the Company’s total share capital consists of 10,800,000,000 shares. Sinopec Corp., being the controlling shareholder 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 were dispatched and the cash dividend was 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, in 2013 the shareholders of Secco agreed 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 was obligated to contribute an amount of U.S.$30,017,124 in installments. We have paid U.S.$9,817,718 and U.S.$1,884,050 on December 10, 2013 and March 5, 2014, respectively.

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

B. Business Overview

We are one of the largest petrochemical companies in China based on 20142015 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 20142015 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 2012, 2013, 2014 and 20142015 are summarized as follows:

Net Sales of RMB87,217.3 million in 2012

Net Sales of RMB105,503.2 million in 2013

Net Sales of RMB92,725.0 million in 2014

Net Sales of RMB67,037.2 million in 2015

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 2012, 2013, 2014 and 20142015 are as follows:

2012 Net Sales by Region (%)

2013 Net Sales by Region (%)

2014 Net Sales by Region (%)

2015 Net Sales by Region (%)

Business Strategy

In 2015,2016, we expect that our business and operating conditions will remain challenging. We will continue our efforts to ensure the high safetyquality and environmental protection standardseffectiveness in our production. We will also endeavor to maintain stable productionthe safety and environmental protection standards while focusing on enhancing our product structure and improving the quality of our productsrealizing sustained promising operating results in 2015.2016. We will seek to further strengthen our internal managementdeepen system optimization, lower costs and endeavor to maximize economic benefitsenhance efficiency in order to maintain our sustainable growth.

To achieve our business objectives in 2015,2016, we will work diligentlystrive to fulfill the following tasks:goals:

(a) Further implement Quality,safety and environmental protection standards

We have established a Health, Safety and Environment (“QHSE”HSE”) accountability system and will continue to implement various mechanisms to prevent occurrence of any accidents. On top of optimizing our local corporate co-operation mechanism, we will increase our efforts on hazards examination and on-site supervision and improving safety level of our oil and gas pipelines. We will enhance our supervision of HSE process to seek to eliminate potential safety hazards. By establishing the work mechanism and management system of hazard and operability study (“HAZOP”), we will fully commence the risk assessment on HAZOP. Meanwhile, we will formulate the environmental protection accountability system and implement such system to increase the awareness of environmental protection. We will continue the examination of environmental protection hazards as well as our leak detection and repair (“LDAR”) work. We will also strive to enhance supervision and checks of occupational hygiene and seek to optimize the on-site safety protection measures for production and operation, so as to safeguard occupational health.

Ensure stable production

We will implement QHSE management in a comprehensive manner, prioritize the direct safety supervision in operating procedures and further enhanceBy enhancing the management and assessment system in relationproduction organization and co-ordination, we endeavor to safetyimprove the management of process technology, stringently monitor our operation and environmental protection. Meanwhile, we are committed to green and low carbon operations, energy saving and emission reduction, as well as clean production. Hence, we will tighten control over discharge of waste water, waste solid and waste gas from end sources, and seek to maintain a 100% proper treatment ratio. In addition, we will strictly supervise and evaluate the performanceminimize non-scheduled shut-downs of our contractorsfacilities. We will focus on modification and shut-down check and repair for our production facilities, so as to raise their awarenessbalance raw materials management and to ensure the stable operation of QHSE management.our overall production system. We will continue to reinforcemonitor the quality standard of “Making Every Drop Count”safety and promote stronger oversight in every production procedure, thereby putting in place our stringent controls on outgoing products.

(b) Enhance management of production and operations

We will further improve the managementefficiency of our production systemequipment, and implement our reporting system in relation to major production incidents, with an aim to minimize unexpected production disruptions. We will also strengthen the management of our production process technology and improve our supervision of production progress in meeting technical requirements and economic targets. In addition, we will also strengthen our operations management and fully leverage the strengths of our platform used for processing malfunction and repair requests of our production facilities. Through our major efforts in QHSE-based detection and prevention of potential hazards in our production facilities, we are expected to be able to effectively improveenhance our management of facilities.equipment failures by strengthening examination and repair to seek to ensure safe operation of equipment.

(c) Optimize production process to reduce operation cost and expenditure

WeAdhering to the practice of “daily calculation of products’ marginal effectiveness and weekly identification of the corporate potential”, we will continue to adoptutilize our major product optimization model and enhance our tracking of contributions from chemical devices, and then we will adjust the userespective workload on a timely basis in accordance with the change of cost-to-performance ratio as our primary selection criteria for crude oil purchases while focusingmarginal effectiveness. Based on the selection of ideal sourceschange in price of crude oil and maintaining cost control. As part of our efforts on optimizing the structure of refined oil products, we will continueoptimize and adjust our refined oil product structure while increasing the proportion and production volume of high-end gasoline. We aim to enhance the proportionrecovery rate of olefins and outputreduce the production cost of high-grade refined oil products. With a view to promotingethylene by using advanced technologies. We will adjust the structural adjustment of our petrochemical products, we will adhereraw materials for hydrogen production and fuel structure pursuant to the implementationprice of a dynamic optimization model whereby we will focus on optimizingnatural gas and liquefied gas, so as to reduce production costs. Apart from continuous cost control in the structure of main products, strengthening our tracking of the margin contribution of our chemical plants and adjusting the load of our plants in a timely manner. We will also step up our efforts in minimizing expenditure to further reduce expenses. In addition, we will continue to adhere to our strategy of optimizing our inventory levels. We will ensure the safety and stabilitycourse of production and business operations while minimizing exposure to operating risks. To reduce transportation costs,operation, we will continueplace efforts on cutting costs and expenses. We strive to improvestrengthen financial risk prevention and delineate our sales areas in a prudent manner.control, while enhancing research on fiscal tax policies and proactively taking advantage of the benefits under various tax policies.

(d) Foster project construction, technology development and digitalization

We will organize and coordinate the upgrading and modification of our newly built projects and existing equipment. We strive to strengthen our efforts on handling hazards, energy conservation and emission reduction as well as investment in industry upgrading projects. Apart from gradually eliminating backward production capacity, progress on projects such as modification on the desulfurization of thermal boilers is expected to be accelerated, and we expect to commence construction of projects such as “ultra-low discharge & energy conservation” project in Congeneration Unit of Thermal Power Divisions and 300,000-ton per year of alkylation production. While strengthening scientific research and development, and develop high-tech statistic data information system

Capitalizing on the development opportunities brought about by the production facilities located in the north coast of Hangzhou Bay, we will further adjust and optimize our refinery/petrochemical integration plan. We will proactively facilitate the integration of our refinery with the petrochemical plant while commencing selected high-tech research projects in respect of the production of our petrochemical products which we have relatively strong competitive advantages. We will also focus our efforts on the implementation of key scientific research projects such as the carbon fiber and needle coke project designedcatalyzed conversion of diesel and hydrogen, as well as technological development for new products, industrialization development and market expansion to extract particularly valuable needle coke from residual oil duringadjust the crude oil refining process, while exploring an external sales model for our technical services so as to tap on a new source of profit.product structure. We will proactively foster our industrialfurther regulate the application of Enterprise Resource Planning (“ERP”), Manufacturing Execution System (“MES”), Laboratory Information Management System (“LIMS”), and informatization integration,integrate information technology into every aspect of corporate production. In addition, we will further expand the application of Advanced Process Control (“APC”)advanced process control (APC) system as well asand facilitate the developmentconstruction of ourdigitalization projects, including the comprehensive statistic datastatistics information system.

(e) Strive to enhance internal management

We will furtherstrive to optimize our corporate appraisal system and operation flow by optimizing procedures along the supply chain from crude oil to product. We aim to maximize our effectiveness and will refine our performance appraisal mode. While strengthening our team building and employee management, systemswe will also seek to optimize our staff structure and processes. We will enhance our on-site managementtraining system to improve the quality of production areas and operations. We will continue to strengthen our management structure and to eliminate redundant staff. We will improve our management of performance appraisal,endeavor to create a harmonious and establish and strengthen our performance evaluation management system.stable environment for corporate development.

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 2014,2015, the volume of our production declined,increased slightly, with a total volume of products amounting to 13,570,60013,866,200 tons, representing a decreasean increase of 13.03%2.18% over the previous year. The decreaseincrease was primarily attributable to the following two reasons: (1)because we undertook anreduced frequencies of overhaul of our production plants which resultedand our production facilities operated stably in a significant downtime of our production; and (2) we reduced the crude oil processing volume in response to the downturn of the petrochemical products market.2015.

The following table shows our 20142015 net sales by major products as a percentage of total net sales together with the typical uses of these products.

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.

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 2014,2015, we continued to strengthen our advantages in refining and chemical integration and leverage the strong adaptability of our refining plants to process more high-sulfur crude oil; we used a Process Industry Modeling System (“PIMS”) to determine the cost performance of crude oil to further improve the cost control of crude oil purchases; and the total volume of the main types of oil with high cost performance purchased in the whole year of 20142015 accounted for 96.6% of the total purchase of crude oil, reducing the overall cost of crude oil we purchased.

To enhance the overall profitability, we optimized our ethylene cracking stocks, adjusted and improved our natural gas and fuel gas structure, optimized our hydrogen system, reduced the emission and increased the efficiency of flare gas, increased the outputs of gasoline and aviation kerosene, and optimized naphtha, residual oil and wax oil processing lines. By reducing the output of paraxylene, we increased our supply of high-octane gasoline blending components to produce more gasoline. By substituting aviation kerosene hydrogenation for diesel hydrogenation and upgrading the quality of 3.3 million tons of diesel through hydrogenation, we further optimized the structure of our finished oil products, achieving a diesel to gasoline ratio of 1.42:1.38:1 for 2014.2015. We strengthened our tracking of the margin contribution of our units, and continuously carried out daily profitability measurement for each product so as to promptly detect changes in profitability, quickly adjust the load and running schedule of our production units and afford priority to the production of products with high profitability and market demand.

Crude Oil

Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2014,2015, crude oil accounted for approximately 64.11%51.61% 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 2014,2015, 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 15.314.6 million tons of imported crude oil in 2015.2016. 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 supply of crude oil in 2015.2016. We believe that the mix of crude oil feedstock currently available is satisfactory for our 20152016 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.

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 20152016 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 20152016 production capacity and goals.

In 2014,2015, our crude oil was sourced as follows:

As a result of a consistent decrease in the supply of domestic crude oil, weWe 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. SeeItem 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 20142015 was RMB4,593.96RMB2,521 (U.S.$740.41)389.18) per ton and RMB4,745.62RMB2,590 (U.S.$764.86)399.83) per ton, respectively. In 2014,2015, we processed 14,090,00014.6million tons of imported crude oil and 77,9510.19 million tons of domestic offshore crude oil (including 1,270,0002.01 million 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 adjustmentspromulgatedCircular on Further Improving the Pricing Mechanism of Refined Oil (Fa Gai Jia Ge [2013] No. 624) to adjust the existing refined oil pricing mechanism, which include, among other things, (i) shortening of price reference period from 22 working days to10 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.

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.

In 2014,2015, as the global economic growth remained slow, the demand for petroleum decreased. The shale gas revolution in the U.S. significantly increased petroleum supply. The international crude oil price fluctuated drastically due to the U.S. dollar’s entry into a bullish period after the end of the U.S.’s quantitative easing policy in the fourth quarter of 2014, the OPEC member states’ maintenance of their crude oil outputs to retain their market shares, and geopolitical and some other factors. In 2014,2015, the average West Texas Intermediate (“WTI”) crude oil price on the U.S. mercantile exchanges was US$93.14/U.S.$48.761/barrel, representing a decrease of 4.9%48% from US$97.94/U.S.$93.14/barrel in 2013.2014. In 2014,2015, the average price of Brent crude oil on the London Intercontinental Exchange was US$99.45/U.S.$53.598/barrel, representing a decrease of 8.92%46% from U.S.$108.64/ 99.45/barrel in 2013;2014; and in 2014,2015, the average price of crude oil in Dubai was US$96.66/U.S.$50.91/barrel, representing a decrease of 8.34%47.33% from U.S.$105.45/ 96.66/barrel in 2013.2014.

For the year ended December 31, 20142015 we processed a total of 14,170,20014.795 million tons of crude oil (including 1,274,8002.01 million tons of crude oil processed on a sub-contract basis), representing a decreasean increase of 1,497,6000.625 million tons, or 9.56%4.41%, over the previous year. Of the crude oil we processed in 2014,2015, domestic offshore oil accounted for 77,9510.193 million tons and imported crude oil accounted for 14,090,00014.603 million 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 2014.2015. The average unit cost of crude oil processed (by us) in 20142015 was RMB4,618.68/RMB2,533.46/ton (RMB4,819.11(RMB4,618.68 /ton in 2013)2014), representing a decrease of 4.16%45.15% over the previous year. Our total cost of crude oil processed reached RMB59.56RMB32.39 billion in 2014,2015, representing a decrease of 16.81%45.62% compared to RMB71.593RMB59.56 billion for the previous year, which represented 64.11%51.61% 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 20152016 will be approximately 2.152.1 million tons. In 2014,2015, we consumed approximately 2.162.04 million tons of coal, an increase from 20132014 of 0.050.06 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 2014,2015, the total cost of these materials accounted for approximately 13.18%15.13% 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 20142015 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 59.80%, 37.60%38.53% and 2.60%2.67%, respectively, of the total products we sold.

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 2014.2015. In general we managed to maintain a stable correlation between production and sales in 2014.2015.

Product breakdown

Synthetic Fibers– In 2014, 7.32%2015, 4.7% 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 15.38%16.50% of our sales of synthetic fibers in 2014.2015.

Resins and Plastics – In 2014,2015, approximately 8.68%8.33% of our resins and plastics sales were to provincial and municipal government trading companies and approximately 59.09%58.46% were sold to industrial users. No single customer accounted for more than 2.93%2.78% of our sales of resins and plastics in 2014.2015.

Intermediate Petrochemicals– We sell a variety of intermediate petrochemical products, among which the sale volume of petroleum benzene and paraxylene was relatively high in 2014.2015. Secco is the principal outside consumer of our petroleum benzene. In 2014,2015, we sold 144,600145,500 tons of petroleum benzene to Secco, representing 41.61%40.46% of our total 20142015 production of such product.

Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation (“Oriental”) are the principal outside consumers of our paraxylene. In 2014,2015, we sold 320,000334,300 tons and 137,100130,800 tons of paraxylene, representing 47%50.67% and 20%19.83% of our total 20142015 production of such product, to Jiaxing Petrochemical Company Limited and Oriental respectively, at prices mutually agreed upon by the relevant parties.

Petroleum Products– In 2014,2015, our primary gasoline and diesel customer was Sinopec Huadong Sales Company Limited.

Trading of Petrochemical Products– In 2014,2015, our primarylargest 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 2012, 2013, 2014 and 2014,2015, approximately 40.09%49.11%, 49.11%48.02% and 48.02%40.81% of our net sales, respectively, 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 96.52%99.70% of our products in volume were sold in 2014.2015. In addition, we believe the limitation in transportation infrastructure in China and the difficulties involved in transporting petrochemical products force petrochemical companies in China, including us, to compete primarily on a regional basis. In 2014, 96.21%2015, 88.67% of our net sales were made to customers in Eastern China.

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,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 2014,2015, we had an approximate 0.64%0.6% share of total domestic polyester and acrylic consumption while imports had an approximate 1.17%1.04% share.

The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2014.2015.

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

Resins and Plastics

In 2014,2015, we had an approximate 3.80%2.64% share of total domestic resins and plastics consumption while imports had an approximate 27.92%24.98% share. The following table summarizes the competitive position of our principal resins and plastics products according to domestic sales in 2014.2015.

Intermediate Petrochemicals

In 2014,2015, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 3.49%3.29% share of total domestic consumption, while imports had an approximate 22.90%28.99% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2014,2015, 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 2014.2015.

Petroleum Products

In 2014,2015, we had an approximate 2.66%2.71% share of total domestic petroleum products market while imports had an approximate 3.52%4.54% 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 2014,2015, we sold approximately 99.47%99.55% of our petroleum products in Eastern China.

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, while BP and Sinopec Corp. own 50% and 30% interests in Secco, respectively. 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. To fund Secco’s new projects, in 2013, the shareholders of Secco agreed 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 was obligated to contribute an amount of U.S.$30,017,124 in installments. We have paid U.S.$9,817,718 and U.S.$1,884,050 on December 10, 2013 and March 5, 2014, respectively.

In 2014,2015, Secco achieved a sales revenue of RMB23.682 billion (U.S.$3.656 billion), representing a decrease of 8.8% from its sales revenue of RMB26.132 billion (U.S.$4.212 billion), representing a decrease of 11.02% from its sales revenue of RMB29.370 billion (U.S.$4.852 billion) in 2013.2014. The decrease of sales revenue was primarily attributable to the downturndecline in the price of petrochemical products market and an overhaul of Secco’s production plantsresulted from the decline in 2014 which is regularly carried out every four years.international crude oil price. Secco produced 1,081,0001,270,000 tons of ethylene in 2014,2015, representing a decreasean increase of 86,000190,000 tons over the previous year, downincreased by 7.4%17.6%. Secco sufferedhad a net profit of RMB2.195 billion (U.S.$338.85 million) in 2015, as compared to a net loss of RMB340.27 million (U.S.$54,841.654.84 million) in 2014, as compared to a2014. The net profit of RMB200.63 million (U.S.$33.142 million) in 2013. The net loss was incurred primarily because the domestic petrochemicals market continued to be sluggish,price of raw materials, naphtha, declined as a result of the decline in crude oil price, and Secco’s production facilities were notoperated safely and stably in operation for an extended period of time due to the scheduled overhaul in 2014.2015.

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 2014,2015, we were assessed a total of RMB33.52RMB41.92 million (U.S.$5.406.47 million) in fees for discharges of waste substances.

We completedOn August 6, 2015, in the upgradingfield inspection by the general inspection team of some equipmentShanghai Environmental Protection Monitoring, law enforcement found that visible smoke was emitted from our olefin boiler, which was in violation 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 DistrictShanghai Air Pollution Control Regulations. The Company was imposed a fine of RMB80,000 upon us for such breachRMB10,000 by Shanghai Environmental Protection Bureau on February 18, 2014.November 2, 2015.

On September 1, 2015, the average nitrogen oxides emissions were above the emission limit set forth in the Thermal Power Plant Air Pollutants Emission Standards (GB13223-2011). The Company was imposed a fine of RMB70,000 by Shanghai Environmental Protection Bureau on December 21, 2015.

We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2014, the Company2015, we 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 2014,During 2015, the Company’s overall level of energy consumption per RMB10,000 of product value was 0.851 tons0.807 ton of standard coal, representing an increase of 2.28%decreased by 5.17% from the previous year. As compared to 2013. Inwith 2014, the proper disposal ratiototal volume of waste water, waste solids and waste gas reached 100%, with a year-on-year decrease of 67.36% in the solid residues disposed of by contractors, a year-on-year decrease of 26.07% in chemical oxygen demand (“COD”) discharged was decreased 0.69%, a year-on-year decreasewhile that of 23.51% in the emissions ofsulfur dioxide and nitrogen oxides a year-on-year decreasedeclined by 4.08% and 9.63%, respectively. At the same time, the compliance rate of 25.11% in thewaste water and waste gas emissions reached 100%, and all hazardous waste was disposed of sulphur dioxide, and a year-on-year decrease of 80% in the emissions of flare gas.properly. The average heat efficiency of the heating furnaces reached 92.42% in 2014, an increase of 0.18% over the previous year. In 2014, the Company was actively engaged in carbon inventory and carbon emission trading and met the 2013 carbon emission trading quotas, which signals that our carbon emission trading business has been in normal operation.heaters increased 0.03% to 92.45%.

Insurance

We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2014,2015, was approximately RMB38.9RMB39.014 billion (U.S.$6.276.022 billion) on our property and facilities and approximately RMB3RMB2.36 billion (U.S.$0.480.36 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 anya third party liability insurance with a coverage capped at RMB50 million to cover claims, subject to deductibles, 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.

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.shareholder and actual controller.

Business Operations Relating to Iran and other U.S. Sanctioned Countries

In 2014,2015, we sourced a small amount of crude oil from Iran through a wholly-owned subsidiary of Sinopec Corp., our controlling shareholder, and such amount represented 5.33%5.04% of our total purchase volume of crude oil. Details of the purchase volume and purchase expenses are provided below:

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 0.018% %0.02% of Sinopec Group’s total unaudited sales revenue in 2014. No profits were generated from these business2015. Sinopec Corp. engaged in a small amount of trading activities with an Iranian company with net profit of approximately U.S.$2.71 million in 2014.2015.

We have no performance obligations under any contract to continue to purchase crude oil sourced from Iran in 2014.2015.

C. Organizational Structure.

Our Subsidiaries

Our significant subsidiaries are listed below. All of the subsidiaries named below are incorporated in China.

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 anthe largest integrated petroleum and petrochemical company with upstream, midstream and downstream operations. Based on trading volume in 2014, 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.Asia in terms of operating revenues. 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.

Subsidiaries

Details of Sinopec Corp.’s principal subsidiaries are given in the table below. Except for Sinopec Kantons Holdings Limited and Sinopec (Hong Kong)Overseas Investment Holding Limited, which are incorporated in Bermuda and Hong Kong respectively, all of the below principal subsidiaries are incorporated in China.

Name of Company

Particulars of issued capital

Type of legal entity

Percentage of equity held by Sinopec Corp. and its subsidiary

Principal activities

(millions)

(%)

Sinopec Shanghai Petrochemical Company Limited

RMB10,800

Limited company

50.56

Manufacturing of synthetic fibers, synthetic resin, Resin and plastics, intermediate petrochemical products and petroleum products

Sinopec Kantons Holdings Limited

HK$248

Limited company

60.34

Trading of crude oil and petroleum products

Sinopec Yizheng Chemical Fiber Limited Liability Company Limited

RMB4,000

Limited company

100

Production and sale of polyester chips and polyester fibers

Sinopec International Petroleum Exploration and Production Company Limited

RMB8,000

Limited company

100.00

Investment in exploration, production and sales etc. of petroleum and naturenatural gas

Sinopec Shell (Jiangsu) Petroleum MarketingCatalyst Company Limited

RMB830RMB1,500

Limited company

60.00100.00

SaleProduction and sale of refined oilcatalyst products

BP Sinopec (Zhejiang) PetroleumPipeline Storage & Transportation Company Limited

RMB800RMB12,000

Limited company

100.00

60.00

SalePipeline storage and transportation of refinedcrude oil

Sinopec Qingdao Refining and Chemical Company Limited

RMB5,000

Limited company

85.00

Manufacturing of intermediate petrochemical products and petroleum products

China International United Petroleum & Chemical Co., Ltd.Company Limited

RMB3,000

Limited company

100.00

Trading of crude oil and petrochemical products

Sinopec Hainan Refining & Chemical Company Limited

RMB3,986

Limited company

75.00

Manufacturing of intermediate petrochemical products and petroleum products

Sinopec (Hong Kong)Overseas Investment Holding Limited

HK$13,227U.S.$300

Limited company

100.00

Trading of petrochemical productsInvestment holding

Sinopec Senmei (Fujian) Petroleum Ltd.

RMB1,840

Limited Company

55.00

Sale of refined oil

Sinopec Fuel Oil SalesLubricant Company Limited

RMB2,200RMB3,374

Limited Company

100.00

SaleProduction and sale of refined petroleum products, lubricant base oil, and petrochemical materials

Sinopec Great Wall Energy and Chemical Co., Ltd. (Great Wall Energy and Chemical)Company Limited

RMB18,863RMB20,125

Limited company

100.00

Investment andCoal chemical industry investment management, of coal chemical, production and salessale of coal chemical products

Sinopec Beihai Refinery Co., LtdRefining and Chemical Limited Liability Company

RMB5,294

Limited company

98.98

Import and processing of crude oil, production, storage and sales of petroleum and petrochemical products

Percentage of equity

Name of Company

Particulars of issued capital

Type of legal entity

Percentage of equity held by Sinopec Corp. and its subsidiary

Principal activities

(millions)

(%)

Sinopec-SK(Wuhan) Petrochemical Company Ltd.(Sinopec-SK Wuhan)

RMB6,270

Limited company

65

Production, sales, research and development of ethylene and downstream derivative products.byproducts

Sinopec Qingdao Petrochemical Co., Ltd.Company Limited

RMB1,595

Limited company

100

Manufacturing of intermediate petrochemical products and petroleum products

Sinopec Great Wall Energy and Chemical (Ningxia) Co., Ltd. (Ningxia Energy and Chemical)

RMB5,130

Limited company

95

Production and sales of electricity, cement, development and sales of coals

Sinopec Zhanjiang Dongxing Petrochemical Co., Ltd.Company Limited

RMB4,397

Limited company

75

Manufacturing of intermediate petrochemical products and petroleum products

D. Property, Plant and Equipment.

Real Property

Our corporate headquarters and production facilities, occupying an area of approximately 7.03 square kilometers, are located in Jinshanwei, approximately 75 kilometers from downtown Shanghai. The total gross floor area of all our production and other facilities is approximately 2 million square meters. We own all of the buildings and facilities located at the site. We have the right to use the land upon which our buildings and facilities are located for a term of 50 years beginning in 1993 without the payment of any rent or usage fees other than land use taxes. We also have the right to transfer our land use rights to third parties without any payment to the Chinese government, so long as the use of the land remains the same as when the land use right was granted to us and the terms of the land use right we received will be applicable to any transferees.

Plants and Facilities

The following tables set forth the Rated Capacities of our principal production units. The actual production capacity of a production unit can exceed the Rated Capacity and may be further increased without increasing the Rated Capacity through technical improvements or expansion of such unit. The utilization rate of a production unit is based upon the Rated Capacity rather than actual production capacity and may vary with technical enhancements, changes in production management and scheduling of maintenance.

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for petroleum products and intermediate petrochemicals in 2014:2015: