China fuel price hike no cure for bleeding refiners
Sunday, 12 February 2012 | 00:00
China hiked fuel prices by as much as 4 percent this week to help compensate refiners for rising oil prices, but the increase was too small to staunch the bleeding of most refineries and would leave demand in the world's No.2 consumer intact.
Wednesday's widely anticipated hike of 3 percent to 4 percent lifted pump prices back to the record seen before the last price cut on Oct 9. The retail price of widely-used 93-ron gasoline in Beijing rose back to 7.85 yuan ($1.25) a litre, the highest across the country.
Although users will complain of higher fuel costs, prices now are still far from causing demand destruction, analysts said, adding that only a surge in gas prices to double-digit levels would help cut use by ordinary consumers.
The timing of the hike, following the Lunar New Year holiday and a January increase in China's inflation to 4.5 percent, shows Beijing faces a tough juggling act in reining in inflation while ensuring the financial health of refiners.
Analysts said the hike showed Beijing is moving to ensure its fast-growing economy will not be caught short by a fuel shortage if world oil prices rise on growing geopolitical risk.
The increase probably aims to encourage refiners to maintain high runs and ensure adequate fuel supplies, said Soozhana Choi, commodities research head with Deutsche Bank in Asia.
"The imperative to have more than ample stockpiles on hand may be more acute this year in light of the multitude of potential supply disruption risks in the Middle East as well as Africa," Choi said in a research note.
But several sources at state-owned and private refineries said the 300-yuan a tonne, or four cents a litre, increase would only help cut losses.
"It might be okay for some to process oil bought in December and sell fuel at the latest price levels, but international oil prices climbed in January and have risen further this month," said an official with a refinery in southern China.
"It's not a good sign for refiners."
Chinese refiners have been struggling to make ends meet as global crude prices have outstripped state-set retail prices.
The government said in November that China's refining sector lost 1.17 billion yuan in the first 9 months of last year, though losses reported by the nation's two leading refiners, Sinopec and PetroChina Co Ltd were significantly higher.
Simon Powell, a petrochemical analyst at CLSA, said refiners needed a further 10 percent increase in fuel prices or a drop in crude, combined with no sales price cut, to return to profit.
However, Powell said a change to the fuel pricing mechanism, expected in 2012, would be a key catalyst to help refiners narrow the gap in refining margins and return to profit.
ECONOMY DICTATES DEMAND
Despite the softening economy, analysts said the latest fuel price hike was still small, and none are changing their forecasts for China's 2012 crude oil consumption.
"A small price rise will not add much to expense, only a series may do so," said oil analyst Qiu Xiaofeng of Galaxy Securities.
Instead, the pace of China's economic slowdown will be the major factor in demand and markets are watching to see if Beijing can fend off Europe's debt crisis and successfully steer its economy to a soft landing.
China aims for economic growth of 7.5 percent this year, but analysts believe the world's No.2 economy will ultimately grow more than 8 percent as the central bank eases monetary policy.
"Oil demand will not contract unless the economy is really in trouble," said a Shanghai-based analyst with a foreign securities firm who asked not to be identified.
To be sure, China's crude oil import growth is expected to slow to a 6-year low as economic malaise in Europe hits its export growth, shuttering factories or felling production.
China's implied crude oil demand will rise 5 percent in 2012 to 9.9 million bpd, with net import growth seen up 5.9 percent, the research arm of top state energy group CNPC has forecast.
Still, an expected rebound in car sales in the world's top market, along with redoubled stockpiling, would help offset weakness elsewhere.
A Reuters poll showed demand would also be supported by a ramp-up in refining as a spate of new plants set to come onstream this year process about 500,000 bpd more crude.
Only double-digit prices will undermine fuel consumption, some analysts said.
"China's fuel prices are still low, compared with Japan and Europe," the Shanghai-based analyst said. "We might see oil demand destruction here if gas prices top 10 yuan a litre."