SHANGHAI (Interfax-China) -- China is likely to continue to rely on fuel price adjustments and administrative orders to alleviate potential fuel shortages that may arise from rising international crude oil prices this year, rather than pegging domestic fuel prices to international crude costs, industry analysts said today.
"With crude oil prices at new highs, I expect the National Development and Reform Commission to initiate another round of fuel retail price hikes during the second quarter of this year when the country's various industries such as agriculture, construction and manufacturing return to their full capacity after the cold weather and Chinese New Year holiday," Qiu Xiaofeng, a senior oil product analyst with China Merchants Securities, said.
"However, I don't expect the central government to initiate its promised new pricing mechanism yet, as that would raise prices by 30% to 40%, sending inflation figures flying and shocking the economy," Qiu said.
International crude oil prices broke through the psychologically sensitive $100-per-barrel benchmark on the first two days of the new year on the back of dollar devaluation, falling U.S. oil inventory data and continued disturbance in the world's unstable oil-producing regions. Oil prices could spike well above $100 in 2008 with the downside limited to $70 per barrel, Gordon Kwan, head of China Energy Research with brokerage CLSA, said in a research note.
As a result, predictions about the performances of the country's two largest oil companies this year were not optimistic in several domestic securities companies' research reports. Reasons given were not confined to continued refining losses due to the crude price hikes and limited fuel price adjustment, but were also attributed to the large portion of profit margin from oil production that needs to be submitted to the government in the form of windfall tax and a potential resource tax proposed by the Ministry of Finance in December.
Mounting pressure on curbing further inflation will prevent the government from adopting the new oil product pricing mechanism, and high oil prices will therefore do no good to China's oil companies, unlike international oil companies, as their best earning interval requires oil prices that would leave their refineries room for profits, according to Galaxy Securities. Analysts believe that Sinopec's [NYSE:SHI] refineries cannot turn a profit if crude oil prices are above $70 per barrel.
"China's refining sector will still be prevented from lucrative earnings this year thanks to high oil prices, unlike their international counterparts," a research report published by Guosen Securities said. "Furthermore, this year, they have to face the additional risk posed by an inability to predict the time and level of fuel retail price adjustments by the central government."
PetroChina [NYSE:PTR] may be better positioned in terms of minimizing refining losses, as it is able to secure about 80% of its crude supplies from its own upstream operations, while Sinopec needs to import about 70% of its crude feedstock. On the other hand, PetroChina will not be able to obtain the profits it normally can by selling crude oil on the international market, according to the report. China National Offshore Oil Corp. (CNOOC) [NYSE:CEO] may be the only Chinese company that would really benefit from high crude prices, as it has very limited downstream operations.
PetroChina, along with other Chinese oil companies, is suffering from having had to pay a windfall tax levied on oil production from March 2006, to the tune of as much as RMB 14.9 billion ($2.05 billion) from the first half of last year. The Ministry of Finance is also proposing to adopt a 10% resource tax on crude oil output, though the trial will start at 5%.
Companies involved in renewable energy and alternative fuels will be among the only beneficiaries of high oil prices. Stock prices for Shanghai-listed Goldwind Science & Technology, China's largest wind turbine manufacturer, reached its daily limit yesterday and continued to post a strong 3.41% growth rate today.
China aims to have renewable energy account for 10% of total energy consumption mix by 2010. Though the production cost of renewable energy is still high, soaring oil prices would make them seem more economically viable, Qiu said
(c) Interfax-China 2007. For more intelligence on Chinese metals and mining, contact David Harman in Hong Kong at david.harman@interfax-news.com or (852) 2537-2262.
