Chinese Refiners in a Fix

The Government’s initiative to lower fuel prices may hurt Chinese refiners in the short term. Prices for gasoline, diesel and jet fuel will drop by 3.3%, 3.7% and 5.5%, respectively. The National Development and Reform Commission reported that the corresponding retail prices for gasoline, diesel and jet fuel will be about $954, $846 and $699 per ton.

Refiners in China had been witnessing an upswing in refining margins, led by the rise in fuel prices thrice during the year. This is the first price cut in 2009 following three consecutive increases.

The Chinese Government has played a conservative role in pricing of refined product (particularly gasoline and diesel). It is the policy of the Government to cap prices of refined products to control inflation. Price regulation – which did not allow the companies to pass on high refining costs to consumers – is one of the key reasons for the fall in refiners’ profit during the last year. Being the largest refiner in the country, Sinopec (SNP) was hard hit by this scenario. PetroChina (PTR) is another name in this array.

Sinopec and PetroChina, which operate most of the nation’s retail gasoline stations, are caught in a quandary. While they must ensure that the market is adequately supplied, they also have to stick to the Government’s pricing policies. Thus, the cut in fuel prices will hurt both companies.

While refinery margins may dampen with this price cut, rising costs and special levies on domestic crude oil sales as well as downstream-centric assets portfolio also remain concerns. Our Hold recommendation for both the companies stays unchanged at this stage.

Read the full analyst report on PTR

Read the full analyst report on SNP