State, refiners bear brunt of dearer crude

The mainland government's coffers and the two state-controlled oil refiners will bear the brunt of soaring global oil prices as Beijing is using price controls to shield the economy from most of the impact, analysts say.

However, manufacturers will gradually feel some heat as higher crude oil prices will trickle down to some chemicals because petrochemical prices are not controlled.

'The impact from rising oil prices will be felt mainly by the refineries and the government, which has been handing out subsidies,' said Citigroup chief Asia economist Huang Yiping. 'The recent fuel price rise will have little impact on the consumer price index and consumption.'

In Hong Kong, where fuel prices are not controlled, oil prices also had little impact on inflation and consumption as fuel made up just 4 per cent of the consumer price index, said Citigroup economist Joe Lo.

Mainland transport firms and consumers have been shielded from higher fuel costs as Beijing has not raised retail prices for 17 months until last month.

The impact of a 9 to 10 per cent rise in petrol, diesel and jet fuel prices on November 1has not yet been reflected in the monthly industry data.

The nation's largest oil refiner, China Petroleum & Chemical Corp, would probably bleed several billion yuan this quarter as it would lose US$12 for each barrel of oil it processed, based on an average cost of US$80 a barrel and a break-even point of US$68, said Gordon Kwan, CLSA head of China energy research.

Airlines are using hedging and adding fuel surcharges to air fares to cope with high oil prices. Some analysts say surcharges may undermine demand.

Cathay Pacific Airways, which has said fuel surcharges could offset half of the rise in fuel costs, shrugs off such concern. 'The fuel surcharges that we are implementing are a bit lower than other international carriers,' said chief executive Tony Tyler at an industry forum. 'I don't see the rise in fuel surcharge denting demand.'

Cathay has hedged 40 per cent of its jet fuel for the rest of the year and finds it hard to hedge further when oil prices are at high levels.

China Southern Airlines said it had hedged 15 per cent of its jet fuel consumption for the year. 'I don't believe oil prices will further increase from the current level,' company secretary Su Liang said.

The mainland's car sales had not been affected because strong income growth and the wealth effect from surging stock and property prices supported demand, said Daiwa Securities analyst Alex Fan.

For the year's first 10 months, sales grew 24.02 per cent to 7.15 million units, China Association of Automobile figures show.

Analysts are divided over whether record oil prices will affect the pace of filling up the mainland's strategic oil reserves. DBS Vickers Securities analyst Gideon Lo Wai-yip said the mainland should spread its oil purchases as prices were volatile.