Oil stocks tumble on price caps

PUBLISHED : Friday, 11 January, 2008, 12:00am
UPDATED : Friday, 11 January, 2008, 12:00am

Mainland moves to fight inflation also weaken shares of power companies

Mainland oil and gas, fertiliser and power stocks fell after Premier Wen Jiabao said energy and fertiliser prices would be capped in the near term, as Beijing was in the midst of combatting decade-high inflation.

The central government will freeze petroleum fuel, natural gas and electricity prices 'in the near future', according to a statement released on Wednesday night after a State Council meeting on measures to control consumer prices.

The share price of China Petroleum & Chemical Corp (Sinopec), Asia's largest oil refiner by processing volume, plummeted as much as 8.5 per cent, before ending 6.43 per cent lower at HK$10.76.

The company imported 70 per cent of its crude oil for refining last year, and is estimated to be losing over US$10 for each barrel of oil it processes at current crude prices.

Fellow refiner PetroChina, which primarily refines self-produced crude oil, slid 1.97 per cent to HK$13.96.

CNOOC, a pure oil and gas producer with no refining operation, gained 1.58 per cent to HK$14.12.

Mainland crude oil prices are closely linked to international levels, while refined oil prices are kept artificially low by the central government, resulting in tens of billions of yuan of losses for refiners in the past two years.

'Without an increase in refined oil prices in the near term, the government subsidies become a very important share price driver,' wrote UBS analyst Thomas Wong in a research note.

He estimated that Sinopec will receive a subsidy of less than 10 billion yuan to compensate for last year's refining loss, compared with five billion yuan received in 2006 and 10 billion yuan in 2005.

A Reuters report suggested that the subsidy would be between 10 billion and 15 billion yuan.

Before the subsidy, Sinopec is estimated to have made a net profit of 63.15 billion yuan for last year according to the mean estimate of 19 brokerages polled by Thomson Financial, up 17.2 per cent from 53.9 billion yuan in 2006.

Energy firms also suffered, with Huaneng Power International falling 4.89 per cent to HK$7.78, Datang International Power Generation 4.08 per cent to HK$6.34, Huadian Power International Corp 6.96 per cent to HK$3.34, China Resources Power Holdings 8.32 per cent to HK$23.70 and China Power International Development 6.52 per cent to HK$3.30.

Beijing has not raised power prices for 17 months, although it was supposed to do so since the cost of coal rose more than the 5 per cent threshold under a cost pass-through mechanism for power tariffs to rise so as to compensate power generators for 70 per cent of their coal cost increase.

ABN Amro head of Asian utilities research Gary Chiu wrote in a research report that he expected a 3 per cent tariff rise in the second quarter.

Mr Chiu said investment in coal mines and capacity expansion are key to power producers' long-term profit growth.

Meanwhile, fertiliser producer and distributor Sinofert Holdings' shares sank 10.21 per cent to HK$7.39, while China BlueChemical tumbled 6.85 per cent to HK$5.44.

Urea, a nitrogen-based fertiliser, and potassium-based fertiliser, are on Beijing's price cap list.

Already suffering

Refiners are losing billions of yuan on artificially low prices

For each barrel of crude oil it refines, Sinopec is losing more than, in US$: $10