Profit margins at refiner start to squeeze as local fuel costs fail to match record world oil prices China's fuel price increases this year have failed to match soaring petroleum costs, ensuring a second-quarter net loss for the crude oil refining division of China Petroleum & Chemical Corp (Sinopec), analysts said yesterday. With world crude prices at more than US$60 a barrel, Sinopec - Asia's largest oil refiner - is under increasing pressure to raise prices. But with wholesale and retail fuel prices strictly regulated by the central government, the company is at the mercy of broader state policy goals. Authorised price increases for fuels have consistently lagged crude prices over the past two years, as Beijing has chosen to contain inflation at the expense of corporate profitability. For every US$1 rise in crude oil prices, diesel and petrol prices have to rise by at least 100 yuan a tonne for refiners to maintain profit margins, DBS Securities analyst Gideon Lo said. So far this year, domestic petrol prices have risen by only 450 yuan a tonne and diesel 300 yuan, even as crude oil prices have rocketed by nearly US$20 per barrel. According to an ICEA research note, retail petrol and diesel prices on the mainland are 20 per cent below those of Singapore reference prices. But overall profits of integrated oil giants Sinopec and PetroChina will not be substantially harmed, as oil production profits will more than offset losses at refining and distribution divisions. Sinopec has been hit harder than PetroChina due to its greater exposure to downstream businesses. Analysts have nonetheless forecast an 11.6 per cent rise in Sinopec's net profit this year, according to 23 brokerages polled by Thomson First Call. On Saturday, Beijing allowed wholesale petrol, diesel and jet fuel prices to go up by between 4.3 per cent and 5.2 per cent, to help refiners absorb soaring crude costs. Analysts said the increases were insufficient to cover crude oil costs, with some estimating a second-quarter refining operating loss for Sinopec. The company previously posted refining losses in the first quarter of 2002 and the first half of 2000, in both cases due to relatively weak international fuel demand and ample supply. 'We [estimated that] the price spreads for [petrol] and diesel for Sinopec Zhenhai Refining & Chemical have fallen sharply through the first half of the year, while Sinopec's margins were even worse and is likely to report a loss for its refining segment [for the period],' wrote Daiwa Securities analyst Rachel Tsang Wai-ming in a research note. Hong Kong-listed Sinopec Zhenhai, a Sinopec subsidiary, operates the largest refining facilities in China. JP Morgan estimated in a recent report that Sinopec's refining margins would fall to negative US$1 per barrel in the second quarter, from US$4 in the first quarter. A Sinopec Zhenhai official said the latest rise in fuel prices could boost its refining margin by US$1 to US$2 a barrel, noting that increased production of downstream chemicals has helped offset weakening margins for fuel refining. Its margin was US$5.80 a barrel last year. It has raised the portion of high-sulphur content crude it refines to 70 per cent this year from about 64 per cent last year in an effort to lower costs, he added. High-sulphur crude is cheaper to source but refining it requires greater investment in facilities.