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Momentum building for rise in prices at China's gas pumps

ADDITIONAL details released yesterday on the government's fuel pricing mechanism combined with rising crude costs indicate that an increase at the gas pumps may be coming soon.

Under the mechanism, retail fuel prices can be adjusted when international crude costs move more than 4 percent over 22 consecutive working days, the National Development and Reform Commission said. Benchmark New York crude was quoted on Thursday at above US$57 a barrel, about 10 percent higher than on March 25 when China last raised the price of refined oil products.

"The rule says that the price 'can' be changed, but not 'must' be changed," when those terms kick in, Xu Kunlin, deputy head of the NDRC's pricing department, said in a state radio interview. "The NDRC still wants to watch the market for a little bit longer."

There was speculation on industry Websites and among oil company officials late on Thursday that the government would raise fuel prices by nearly 10 percent effective yesterday. But the plan was cancelled for unknown reasons, according to consultancy CBI China.

Gordon Kwan, energy analyst at Mirae Asset Securities, said the government is waiting for next week's release of April oil import data. If that report confirms a recovery in demand, it will be easier to convince the public that a pump price increase is justified, analysts indicated.

In the past, pump prices were strictly set by the state, and refiners lost money if rises in crude were not sufficiently reflected in changes at the pump.

The government implemented a new mechanism to better reflect market conditions in December last year when crude was low to ensure "reasonable" profit margins for refiners while not putting too high a burden on motorists.

The mechanism, which aims to link domestic fuel prices more closely with crude prices, takes into account crude costs, transport fees, refining costs, taxes and a profit for refiners. But the government reserved the right to step in if crude soared too high, the NDRC, China's top planning agency, said at the time. It deemed the mechanism "temporary" and indicated prices would eventually be set fully by the market.

Stephen Pryor, a vice president at US energy giant Exxon Mobil Corp, told Shanghai Daily on Thursday that China's fuel pricing reform is a "positive" start and he expects full liberalization eventually.

Gasoline and diesel prices on the Chinese mainland are now lower than in many countries, including neighboring Japan. And they are higher than some oil-producing countries and some US cities. In Shanghai for instance, the top retail price for the widely used 93 octane gasoline is 5.19 yuan (76 US cents) a liter.

In yesterday's statement, the planner said refiners would be guaranteed "normal" profits when crude is below US$80 a barrel. When crude is above US$80, the margin will be reduced, and at above US$130, the agency will control or even freeze fuel prices while providing subsidies to refiners.

Analysts said that even though new details of the mechanism were disclosed, they still lack specificity on key issues such as how the international crude prices were calculated and the level of reasonable margin.


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