China Boosts Refining Margins

The National Development and Reform Commission of China said that the government will increase both gasoline and diesel prices, effective today. Both the prices will increase by 300 yuan ($43.98) a metric ton, representing approximately 4%–5% over current average gasoline and diesel retail ceiling benchmarks of yuan 7,310 ($1,072) and yuan 6,570 ($963) a ton.

This is the sixth fuel price adjustment made this year after the government brought the new fuel pricing system which links domestic rates with the international crude oil price changes. The Chinese government’s initiative to raise the ceiling on refined product prices is a welcome development for refiners.

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 companies 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 big name in this group.

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.