Price controls squeeze oil refinery margins

PUBLISHED : Wednesday, 30 March, 2011, 12:00am
UPDATED : Wednesday, 30 March, 2011, 12:00am

Most mainland oil refiners will sink into the red this month if Beijing does not raise retail fuel prices to reflect high crude oil prices, the chief of a major refinery warned yesterday.

Rong Guangdao, chairman of Sinopec Shanghai Petrochemical, the operator of Sinopec's second-largest refinery, said the company's refining profits had been falling consistently over the past three months.

'For the first quarter as a whole, the industry may still be profitable because there is a one- to two-month lag in the reflection of crude prices in refiners' costs, but there is a month-to-month worsening trend,' he said.

Beijing last raised retail fuel prices on February 20, but it was overdue and prices were not lifted enough to protect refiners' profit margins.

Prices should have already been lifted again under a fuel pricing system implemented in 2009, as crude prices have risen more than 4 per cent over a 22-day period, which meets the conditions for a price increase.

But Beijing has the final say on the timing and degree of price adjustments. At times of rising inflation, it tends to delay price rises to protect consumers and maintain social security. Under the system, refiners can expect their margins to be squeezed when crude oil prices trade between US$80 and US$130 a barrel. Beyond US$130 a barrel, they can expect losses.

Sinopec Shanghai on Friday posted a 74 per cent rise in net profit to 2.77 billion yuan (HK$3.29 billion) for last year from 2009 because of higher output and product prices.

Although profits from fuel production worsened in the first quarter of 2011, Rong said downstream chemicals margins have been maintained as product prices rose in tandem with crude oil prices. For this year, it planned to raise fuel output by 6.7 per cent, and chemicals output is expected to be steady.

The firm has budgeted three billion yuan this year for capital expenditure, mainly to expand its annual refining capacity to 16 million tonnes from 14 million tonnes. The project will be completed next year.

Despite the prospects of being squeezed by high crude prices, Rong said the refinery expansion was intended to cope with fast-rising demand for fuel in the country's east.

The budget will also fund facilities to make chemicals that are more technology-intensive and lucrative than basic chemicals. They include high-end polyethylene, which is sturdy and lightweight enough to replace steel in gas pipelines, as well as carbon fibre, which can replace some parts of aircraft and cars.

But Rong said the technologies were expensive and difficult to develop and his firm had so far relied on foreign technology.



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