Beijing is most likely to retain control over domestic refined fuel prices to protect consumers when crude oil prices rise to extreme levels.
Sources say this means refiners will get less benefit from a much-awaited reform of the mainland’s refined fuel pricing mechanism.
Senior government officials are in intense discussions in Beijing over what to do with domestic fuel prices, whose premium over international levels have been rising as crude oil prices tumble, they say.
“There is no way the government will allow full liberalisation of fuel pricing,” said a senior manager at one state-owned oil refining major. “A likely outcome will be a formula for refining margins to stay within a certain range ... but when prices spike sharply to levels that may negatively affect social stability, price curbs will still be imposed.”
Reuters quoted an unnamed source as saying the new regime under discussion would allow refiners to charge up to 4 per cent more or less than the new market prices, which will be the sum of refinery-gate prices and transportation and distribution costs. Details of a pricing formula are still being ironed out.
Speculation that Beijing will move towards greater fuel price liberalisation sent shares of China Petroleum & Chemical Corp (Sinopec) 10.6 per cent higher in Shanghai over the past three days while rival PetroChina gained 4.2 per cent. But Sinopec only edged up 2.3 per cent in Hong Kong, while PetroChina was flat.
Both companies have suffered profit declines despite rising crude prices as government subsidies were insufficient to offset refining losses due to retail fuel price controls.
The objective of the new regime was to provide a relatively steady profit margin to refiners and provide a closer linkage of domestic prices to international ones, sources said, but the uncertainty was the degree of liberalisation Beijing would tolerate.
The key to differentiating the new regime from the current system would be the amount of transparency the government will provide, and what level or range of crude prices will be regarded as extreme and would require price intervention.
This is because the existing system already provides a linkage of domestic prices to international ones, though it regulates prices on the retail level instead of the refinery-gate level.
The system broke down only because sharp spikes of crude prices in the last few years raised fears among officials that letting prices follow international market prices would hurt the disadvantaged such as farmers, and threaten social stability.
Industry policy setter National Development and Reform Commission so far has only said it has joined hands with government departments to discuss ways to improve the pricing system, lower fuel prices and introduce a fuel tax to replace various toll road and shipping charges to encourage fuel conservation and cut pollution.
Mainland fuel prices were first liberalised in July 2000, when they were linked to a basket of international benchmarks.
A Goldman Sachs report says refining margins enjoyed by Sinopec ranged from US$3.50 to US$4 a barrel between 2000 and 2004, before crude prices soared wildly until this July.
“We believe this is the range of profitability the government is willing to allow the industry to enjoy,” the report said.
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Beijing to Keep Reins on Refined Fuel Prices
Refiners will get less benefit from reform
Eric Ng
22 November 2008
Beijing is most likely to retain control over domestic refined fuel prices to protect consumers when crude oil prices rise to extreme levels.
Sources say this means refiners will get less benefit from a much-awaited reform of the mainland’s refined fuel pricing mechanism.
Senior government officials are in intense discussions in Beijing over what to do with domestic fuel prices, whose premium over international levels have been rising as crude oil prices tumble, they say.
“There is no way the government will allow full liberalisation of fuel pricing,” said a senior manager at one state-owned oil refining major. “A likely outcome will be a formula for refining margins to stay within a certain range ... but when prices spike sharply to levels that may negatively affect social stability, price curbs will still be imposed.”
Reuters quoted an unnamed source as saying the new regime under discussion would allow refiners to charge up to 4 per cent more or less than the new market prices, which will be the sum of refinery-gate prices and transportation and distribution costs. Details of a pricing formula are still being ironed out.
Speculation that Beijing will move towards greater fuel price liberalisation sent shares of China Petroleum & Chemical Corp (Sinopec) 10.6 per cent higher in Shanghai over the past three days while rival PetroChina gained 4.2 per cent. But Sinopec only edged up 2.3 per cent in Hong Kong, while PetroChina was flat.
Both companies have suffered profit declines despite rising crude prices as government subsidies were insufficient to offset refining losses due to retail fuel price controls.
The objective of the new regime was to provide a relatively steady profit margin to refiners and provide a closer linkage of domestic prices to international ones, sources said, but the uncertainty was the degree of liberalisation Beijing would tolerate.
The key to differentiating the new regime from the current system would be the amount of transparency the government will provide, and what level or range of crude prices will be regarded as extreme and would require price intervention.
This is because the existing system already provides a linkage of domestic prices to international ones, though it regulates prices on the retail level instead of the refinery-gate level.
The system broke down only because sharp spikes of crude prices in the last few years raised fears among officials that letting prices follow international market prices would hurt the disadvantaged such as farmers, and threaten social stability.
Industry policy setter National Development and Reform Commission so far has only said it has joined hands with government departments to discuss ways to improve the pricing system, lower fuel prices and introduce a fuel tax to replace various toll road and shipping charges to encourage fuel conservation and cut pollution.
Mainland fuel prices were first liberalised in July 2000, when they were linked to a basket of international benchmarks.
A Goldman Sachs report says refining margins enjoyed by Sinopec ranged from US$3.50 to US$4 a barrel between 2000 and 2004, before crude prices soared wildly until this July.
“We believe this is the range of profitability the government is willing to allow the industry to enjoy,” the report said.
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