10:56     SHANGHAI PECHEM<00338> - Announcement (7)                           

    not exceeding 6%.                                                         
                                                                              
    The Company will settle the purchases by way of cash payments.            
    Caps: For the three years ending 31 December 2007, the annual             
    transaction values in relation to purchases of crude oil related raw      
    materials from China Petroleum & Chemical Corporation and its             
    associates shall not, in aggregate, exceed the caps of RMB 21.6           
    billion, RMB 23.8 billion and RMB 26.3 billion, respectively.             
                                                                              
    The caps referred to above are determined with reference to:              
    (a)                                                                       
    the previous transactions conducted and transaction amounts in            
    respect of purchases of raw materials from China Petroleum & Chemical     
    Corporation and its associates;                                           
                                                                              
    (b)                                                                       
    the Company's estimate of its business growth;                            
    (c)                                                                       
    the Company's estimate of the increase in its production capacity;        
                                                                              
                                                                              
    (d)                                                                       
    the Company's estimate of the increase in the costs of raw                
    materials.                                                                
                                                                              
    Additionally, the Company has recently completed the construction of      
    several facilities, including the 8,000,000 ton/year atmosphere and       
    vacuum distillation plants (completed on 15 December 2004), the           
    expansion of the capacity of the PTA plant to 400,000 ton/year            
    (completed at the end of September 2004), the three-kettle process        
    150,000 ton/year PET plant (completed on 1 October 2004), and the         
    construction of the technology upgrade project for industrial             
    polyester filament of 12,000 ton/year (completed on 28 December           
    2004). These newly completed projects have significantly increased        
    the production capacity of the Company which also gives rise to an        
    increase in the need for crude oil and other raw materials. Taking        
    into account these factors, the Company arrives at the caps above.        
                                                                              
    2.3.2                                                                     
    Sales of Petroleum Products                                               
    Background: Transactions involving sales and purchases of petroleum       
    products including gasoline, diesel and jet oil are subject to            
    regulation by the PRC government. Since the Company's initial public      
    offer on 6 July 1993, the Company has been selling petroleum products     
    in accordance with the State's requirement to China Petroleum &           
    Chemical Corporation including its Huadong Sales branch.                  
                                                                              
    China Petroleum & Chemical Corporation was one of the Company's five      
    largest customers for the three years ended 31 December 2004. The         
    table below sets forth the historical figures of the Company's            
    aggregate sales of petroleum products to China Petroleum & Chemical       
    Corporation for each of the three years ended 31 December 2004:           
                                                                              
                                                    Historical                
                                                    Figures for               
                                                    the year ended            
                                                    31 December               
                    2002            2003            2004                      
                    (RMB million)   (RMB million)   (RMB million)             
    Aggregate       7,400           8,146           11,473                    
    Sales of                                                                  
    petroleum                                                                 
    products to                                                               
    China                                                                     
    Petroleum &                                                               
    Chemical                                                                  
    Corporation                                                               
                                                                              
                                                                              
                                                                              
    The Company proposes to enter into the Sales and Purchases Framework      
    Agreement to continue to sell petroleum products to China Petroleum &     
    Chemical Corporation and its associates for the three years ending 31     
    December 2007.                                                            
                                                                              
    Reasons for such transactions: China's oil and petrochemical              
    industry has always been the subject of extensive regulation by the       
    PRC government. Transactions involving the sale and purchase of           
    petroleum products are controlled by the PRC government. Accordingly,     
    the Company's sales of petroleum products are governed by the             
    relevant PRC regulations and measures. These regulations and measures     
    dictate the transaction value, the volume and all other terms and         
    conditions at which the Company conducts its sales of petroleum           
    products.                                                                 
                                                                              
    Pricing: Pursuant to the Sales and Purchases Framework Agreement,         
    the sales of petroleum products to China Petroleum & Chemical             
    Corporation and its associates under the Sales and Purchases              
    Framework Agreement are determined in accordance with the following       
    pricing policies:                                                         
                                                                              
    (a)                                                                       
    if there are applicable State (central and local governments)             
    tariffs, the pricing of the Company's sales shall be bound by the