Tuesday 9 December 2008
Fuel Tax Reform to Finally Benefit PetroChina and Sinopec
The government has announced it will solicit opinions on the reform of fuel consumption tax. To implement the tax collection differently from other countries, i.e. retail prices including fuel tax, will reduce sales profits of China’s two dominant oil companies, China National Petroleum Corporation (CNPC), PetroChina’s parent, and China Petrochemical Corporation (CPC), Sinopec’s parent, while increasing their profits from refining.
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Fuel Tax Reform to Finally Benefit PetroChina and Sinopec
Niu Zhijing, Shanghai
7 December 2008
The government has announced it will solicit opinions on the reform of fuel consumption tax. To implement the tax collection differently from other countries, i.e. retail prices including fuel tax, will reduce sales profits of China’s two dominant oil companies, China National Petroleum Corporation (CNPC), PetroChina’s parent, and China Petrochemical Corporation (CPC), Sinopec’s parent, while increasing their profits from refining.
CPC looks to be the biggest beneficiary in the tax reform on oil refining, but on the whole, CNPC will expand its advantages in the Chinese market.
In accordance with the reform plan, China will increase the unit consumption tax of gasoline and diesel from 0.2 yuan per liter to 1 yuan per liter, and 0.1 yuan per liter to 0.8 yuan per liter on the premise of maintaining the current prices of refined oil. These taxes will substitute for simultaneously cancelled charges on roads and waterways.
At the same time, the government announced a new adjustment program for the prices on refined oil. In the future, the producer prices of gas and diesel of both CNPC and CPC will be based on crude oil prices in the international market, and then determined by the average domestic processing costs, taxes and a reasonable profit. The retail price will be based on the total producer price, with the maximum price difference of 4% in the process of circulation, instead of the current 8% for self-adjustment.
According to analysts, after imposing the fuel tax reform, overall prices may drop and thus boost the overall consumption of refined oil.
It was expected by the oil management in a recent investor meeting that prices for refined oil will be lower than they currently are based on several principles of the fuel tax reform put forward by the National Development and Reform Commission.
It is not yet clear whether the producer price mechanism referred to in the program will be realized in January next year. The government has promised before to implement reform on the refined oil pricing mechanism but has never managed to adjust the price according to the dynamic prices in the international market and has held on to its control of consumer prices.
If the mechanism of producer prices is this time implemented, both giants will find life more profitable during the refining process, especially CPC.
The two companies have long incurred huge losses because they have had to purchase a lot of crude oil at high prices, particularly CPC, which heavily relies on imports, and sell at government-set low prices.
The now steadily decreasing price of crude on the international market provides a good opportunity for China to launch reform on oil prices and fuel consumption tax collection. The futures prices of light crude oil in January New York Mercantile Exchange has dropped by 60% compared to the summit price this year.
Analysts believe Chinese oil companies will still face losses even with prices totally in line with those overseas because their refining efficiency and marketing have not been improved compared with overseas rivals.
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