Refiners rally in wake of fuel price reform
Mainland oil refiners saw their share prices rise strongly yesterday after Beijing unveiled a reform of retail price-setting for fuel aimed at better matching regulated domestic prices with free-market prices.
However, analysts warned that the government had given no assurance that refiners' profit margins would not turn negative again if the sharp gains in crude prices earlier this year were to be repeated.
Gains were led by China Petroleum & Chemical Corp (Sinopec), the country's largest oil refiner and fuel distributor, the share price of which shot up 9.57 per cent to HK$5.15, while rival PetroChina gained 7.2 per cent to HK$6.70.
The central government unveiled a plan last Friday to adopt on January 1 a 'cost-plus' approach to fuel pricing, under which refining and operating costs and a 'reasonable' margin would be added to the cost of crude oil to give retail prices.
Existing retail prices are supposedly tied to a basket of three international benchmarks with a time lag, although in practice the linkage has been broken as Beijing, which has the final say on prices, opted to keep fuel prices low despite soaring crude prices, to prevent social discontent.
Beijing said on Friday it would retain 'suitable' price regulation authority and has not indicated what sort of refining margin would be deemed 'reasonable'.
'This implies policy risks will remain in the long term,' China International Capital Corp analyst Zhang Jintao said in a report.
CLSA head of China energy research Gordon Kwan estimated Beijing might allow the oil majors refining margins of about US$4.50 a barrel, in line with prevailing margins in the free markets.
Along with the pricing reform, Beijing raised the consumption tax on petrol fivefold and that on diesel eightfold and, to offset the burden on car owners, abolished six road-use fees they pay regardless of mileage.
The move, aimed to promote fuel economy, could depress fuel demand in the long term, although the short-term impact is limited, as it takes time for consumption behaviour to change.
Despite the tax rise, Beijing kept retail prices stable last Friday, resulting in a cut in refiners' revenues and profits of about 13.3 per cent.
Analysts said refiners would be squeezed further by the long-awaited reduction in fuel prices, as Beijing has not cut them despite a 72 per cent fall in the oil price since July, in order to let refiners offset earlier losses due to price controls.
Shenyin Wanguo Securities analyst Yu Chunmei tipped a drop of about 600 yuan (HK$676) a tonne or about 9 per cent on January 1.
Meanwhile, analysts said falling chemical prices would also squeeze refiners' profits. Ms Yu said plunging chemical prices and the consumption tax increase had dragged refiners' break-even price for crude oil refining to just over US$70 a barrel from almost US$100 in the third quarter.