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China's fuel pricing reform set to benefit oil refiners
By Fitch Ratings |
April 4, 2013, Thursday
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Print Edition
Print Edition
THE new petroleum product pricing framework in China, albeit not fully free of state intervention, would benefit refiners in China by allowing greater pricing flexibility.
The long-awaited reform of the pricing mechanism of gasoline and diesel includes shortening of the price adjustment window and removing the threshold for price adjustments.
Under the reform, China's National Development and Reform Commission (NDRC) would adjust official fuel prices based on the 10-working day moving average of a basket of international crude prices exceeding 50 yuan (US$8) per ton (which is around 0.5 percent based on current prices).
This compares with previous adjustment of prices based a 22-working day average exceeding 4 percent. NDRC, however, retains the discretion to intervene if there is exceptional volatility in the international oil market or to manage domestic inflation.
The new mechanism will allow for price changes to reflect global market adjustments in a more timely manner and help improve refining margins. Both China Petroleum & Chemical Corporation, better known as Sinopec, and PetroChina Company Limited incurred losses in their refining business during 2012 of 11.4 billion yuan and 33.7 billion yuan, respectively.
Narrowing loss
This was largely due to, under the previous pricing mechanism, their inability to pass on high feedstock costs to end-users during periods of oil price inflation. As of the result of the reform, Fitch now expects Sinopec to turn a profit in its refining business and PetroChina to significantly narrow its refining losses in 2013.
Fitch also believes that natural gas pricing is likely to be the next candidate for additional reforms in the energy sector.
Currently, a more market-based pricing scheme is being tested in Guangdong Province and Guangxi Zhuang Autonomous Region. However, pricing reforms across China will be gradual. This means PetroChina is likely to continue to make losses on its gas operations in 2013 as it continues to import large quantities of expensive imported piped gas and liquefied natural gas to meet demand. PetroChina incurred a loss of 2.1 billion yuan for its natural gas and pipeline operation during 2012, compared with gross earnings of 15.5 billion yuan in 2011.
The article was based on a release by Fitch Ratings on April 2. The opinions are those of Fitch Ratings.
The long-awaited reform of the pricing mechanism of gasoline and diesel includes shortening of the price adjustment window and removing the threshold for price adjustments.
Under the reform, China's National Development and Reform Commission (NDRC) would adjust official fuel prices based on the 10-working day moving average of a basket of international crude prices exceeding 50 yuan (US$8) per ton (which is around 0.5 percent based on current prices).
This compares with previous adjustment of prices based a 22-working day average exceeding 4 percent. NDRC, however, retains the discretion to intervene if there is exceptional volatility in the international oil market or to manage domestic inflation.
The new mechanism will allow for price changes to reflect global market adjustments in a more timely manner and help improve refining margins. Both China Petroleum & Chemical Corporation, better known as Sinopec, and PetroChina Company Limited incurred losses in their refining business during 2012 of 11.4 billion yuan and 33.7 billion yuan, respectively.
Narrowing loss
This was largely due to, under the previous pricing mechanism, their inability to pass on high feedstock costs to end-users during periods of oil price inflation. As of the result of the reform, Fitch now expects Sinopec to turn a profit in its refining business and PetroChina to significantly narrow its refining losses in 2013.
Fitch also believes that natural gas pricing is likely to be the next candidate for additional reforms in the energy sector.
Currently, a more market-based pricing scheme is being tested in Guangdong Province and Guangxi Zhuang Autonomous Region. However, pricing reforms across China will be gradual. This means PetroChina is likely to continue to make losses on its gas operations in 2013 as it continues to import large quantities of expensive imported piped gas and liquefied natural gas to meet demand. PetroChina incurred a loss of 2.1 billion yuan for its natural gas and pipeline operation during 2012, compared with gross earnings of 15.5 billion yuan in 2011.
The article was based on a release by Fitch Ratings on April 2. The opinions are those of Fitch Ratings.
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