Beijing cuts petrol and diesel prices by 3pc

PUBLISHED : Wednesday, 29 July, 2009, 12:00am
UPDATED : Wednesday, 29 July, 2009, 12:00am

The central government will cut mainland petrol and diesel prices by about 3 per cent from today, in the latest round of adjustments to keep in line with global crude oil prices.

The move will slash refining profit at the nation's two largest refiners, China Petroleum & Chemical Corp (Sinopec) and PetroChina, but will cut fuel costs for hundreds of millions of motorists. Airlines will also benefit.

Retail consumers will pay 220 yuan (HK$250) per tonne less on petrol and diesel, according to a statement issued by the National Development and Reform Commission last night.

Prices vary between regions. Beijing petrol prices have been cut by 2.77 per cent to 7,710 yuan per tonne, compared with a 2.93 per cent reduction to 7,280 yuan in Shanghai. Diesel prices fell 3.03 per cent in the capital and 3.26 per cent in the east-coast financial centre.

Jet fuel prices have been cut by about 5.5 per cent, with the No1 jet fuel's ex-factory price cut to 4,650 yuan a tonne from 4,920 yuan.

Analysts said the price cut was within their expectations, noting that since December last year, Beijing has implemented a new price mechanism that closely ties domestic fuel prices to international crude price movements as long as crude prices are below US$80 a barrel. When it exceeds US$80, refiners will see lower profit margins as the linkage will be broken. When it exceeds US$130, they will see losses due to price controls, but which will be partly offset by compensation from state coffers.

Under the mechanism, when the 22-day moving average price of the crude benchmarks of Brent, Dubai and Cinta moves more than 4 per cent, a domestic fuel price adjustment will be triggered.

Based on calculations by the South China Morning Post, a signal for change was activated on July 16.

'Like the previous price rise, the latest price cut was fairly timely,' said Mirae Asset Securities energy analyst Gordon Kwan. 'It will reinforce the market notion that Beijing is implementing the new pricing mechanism properly.'

But he added that full compliance to the principle was not automatic as it took much longer than expected for a price rise to be sanctioned in early June. 'Price adjustments are always subject to judgment by policymakers, taking into account the impact on the wider society,' he said. 'The real test of the system will come probably next year when crude prices surpass US$80 a barrel.'

He estimated that for every 1 per cent change in domestic fuel price, Sinopec's refining profit would be cut by 5 per cent.