The New York Times


March 25, 2006

China Sets Rise in Retail Fuel Prices

Filed at 10:44 a.m. ET

BEIJING/SINGAPORE (Reuters) - China will raise retail diesel and gasoline prices for the first time in eight months this weekend, but the 3-5 percent increase will leave refiners in the red and do little to deter fuel demand.

The modest rise, reflecting Beijing's continued caution over reform, may send shares in listed refiners lower next week but should leave an expected rebound in oil demand from the world's second-biggest consumer on track this year.

The price of retail gasoline will increase by 250 yuan ($31) per tonne and diesel will rise by 150 yuan, an industry official in China said. They are the first rises since July 23, but well below most expectations after weeks of feverish rumors.

``We got the notice around lunchtime,'' the official told Reuters. The National Development and Reform Commission, China's powerful economic policy body, strictly controls fuel prices and normally notifies refiners of changes a day in advance.

China's 1.3 billion people have been sheltered from the full impact of soaring global energy costs, allowing oil use to grow unchecked and causing huge losses at its state-owned refiners.

Beijing has increased prices by about 20 percent since the start of 2005, including Sunday's move. Global crude oil prices (CLc1) have soared by 48 percent over that time.

The increase was expected by the end of the month, and talk it could be as high as 20 percent lifted shares in Sinopec Corp (0386.HK)(SNP.N), Asia's top refiner, and PetroChina (0857.HK).

``It's hard to believe that this is it, after all the speculation,'' said David Hurd, oil analyst at Deutsche Bank in Hong Kong. ``The market is going to be very disappointed.''

Shares in Sinopec, which suffers more from low domestic fuel prices as it imports most of its crude, rallied 4.4 percent in the week to Friday while PetroChina climbed 5.2 percent.

But they are unlikely to hold on to all of those gains.

``This is a very mild increase, it means refiners will remain in the red,'' said Gideon Lo, oil analyst at DBS Vickers. ''It could also mean that the government may need to give another subsidy to Sinopec.''

Beijing handed Sinopec $1.2 billion last year to make up for its huge losses. PetroChina said last week that it lost 19.8 billion yuan ($2.5 billion) on refining and fuel sales in 2005.


Analysts were also disappointed that the increase did not appear to be accompanied by broader reforms to align pump rates more closely with global crude costs and allow them to fluctuate more freely, keeping refiners' margins in the black.

``Now that they've raised the price, that could mean they are putting on hold the new scheme,'' said Lawrence Lau of BOCI.

A bolder plan to allow more frequent price changes in bigger steps may have been held back by the thorny issue of how to shield lower-income users, mostly the country's 800 million peasants, against rising fuel costs.

The government has pledged to use pricing and tax measures to curb consumption, but is also committed to boosting rural incomes -- goals which are hard to reconcile because of farmers' reliance on diesel to fuel tractors and other machinery.

``The subsidy has to cater to too many consumers. It will be a very tough job,'' said Yan Kefent, a senior oil analyst with


Refiners were given marginally better returns than retailers, with the ex-refinery price of gasoline raised by 300 yuan and diesel by 200 yuan, reflecting Beijing's plan to give them greater incentives, the industry official said.

Worries about vanishing margins contributed to fuel shortages last summer after refiners boosted more profitable exports at the expense of domestic supplies.


The mild increase will be a relief to bullish oil traders, who are counting on a rebound in Chinese consumption -- which at 6.6 million barrels per day (bpd) accounts for about 8 percent of global oil demand -- to extend a four-year price rally.

Slightly higher prices are unlikely to change the habits of China's increasingly wealthy drivers or curb use among its 800 million rural population, analysts said, posing little threat to an expected 6 percent increase in oil demand this year.

``The economy and prosperity in China is growing so fast that I think the impact of this will be quite negligible,'' said Ong Eng Tong, Asia representative of German oil trader Mabanaft.

After the rise, which takes effect at midnight, pump prices for gasoline and diesel will be about 53 cents and 52 cents per liter, still among the lowest in Asia.

Domestic wholesale diesel and gasoline prices -- the best gauge of China's oil supply and demand -- have shot to record highs, with diesel prices 10 percent above retail rates as users stocked up in anticipation of a much bigger increase.

Consumer hoarding on speculation of the rise had forced retailers to ration supplies in some eastern provinces, but the market may now be flooded as wholesalers draw down stocks.