Chinese Refining Margins Looking Up

The Chinese Government’s initiative to raise the ceiling on refined product prices is a welcome development for refiners. A recent 11% hike in fuel prices is the third increase in this year. The National Development and Reform Commission reported that retail price for gasoline will be approximately $3.16 per gallon, compared to an average of $2.69 per gallon in the U.S.

Refiners in China had been witnessing a weakness in refining margins due to an increase in crude prices and the Government’s conservative role in refined product (particularly gasoline and diesel) pricing. The Government caps the prices of refined products to control inflation. These price regulations – which did not allow the company to pass on high refining costs to consumers – are one of the key reasons for refiners’ profit slide during the last year. Being the largest refiner in the country, China Petroleum & Chemical Corp or Sinopec (SNP - Analyst Report) was hard hit by this scenario. PetroChina (PTR - Analyst Report) is another name in this array.

Sinopec and PetroChina, who operate most of the nation’s retail gasoline stations, must ensure that the market is adequately supplied and must stick to the Government’s pricing policies. Therefore, these fuel price increases are a very positive aspect for both the companies. Yesterday, ADR prices for Sinopec and PetroChina jumped 6.4% and 2.7%, respectively, from their previous closing prices.

Despite this positive news, rising costs and special levies on domestic crude oil sales as well as downstream-centric assets portfolio remain concerns. Our Hold recommendation for both the companies stays unchanged at this stage.