Bloomberg News

China Cuts Fuel Price First Time in 2011 to Tackle Inflation

October 10, 2011

(Updates with share prices in fifth paragraph.)

Oct. 10 (Bloomberg) -- China cut fuel prices for the first time this year amid a slump in crude-oil costs and government efforts to tame inflation.

Wholesale gasoline and diesel prices were both reduced by 300 yuan ($47.20) a metric ton, effective yesterday, the National Development and Reform Commission, the nation’s top economic planner, said. That represents a 3.5 percent drop for gasoline and 3.9 percent for diesel, according to prices provided in an Oct. 8 statement by the NDRC.

Policy makers for the world’s second-largest economy are trying to cool inflation while sustaining an expansion as a deepening debt crisis in Europe and faltering growth in the U.S. threaten to sap export demand. The increase in China’s consumer price index eased to 6.2 percent in August after hitting a three-year high of 6.5 percent in July.

China’s two biggest oil refiners, China Petroleum & Chemical Corp. and PetroChina Co., “are being asked to perform national service by offering cheap fuels amid the domestic inflation clampdown,” Gordon Kwan, Mirae Asset Securities Ltd.’s head of regional energy research in Hong Kong, said in an e-mail in response to Bloomberg questions. “These fuel price cuts do not surprise us and more could come if the Brent crude price falls below $100 per barrel this winter.”

Share Slump

China Petroleum, or Sinopec, fell as much as 6.3 percent, the most since Sept. 22, to HK$7.02 today and were at HK$7.11 at 3:17 p.m. in Hong Kong. PetroChina dropped as much as 3.3 percent. The benchmark Hang Seng Index slid as much as 1.5 percent.

Brent crude, the benchmark for about half the world’s oil, has fallen 13 percent and New York oil is down 23 percent since China last adjusted prices on April 6. China last reduced oil- product prices in June 2010 and has increased them four times, by about 20 percent, since then.

“China hadn’t raised fuel prices enough” when crude climbed to high levels in late-April and early May, amid concerns of inflation, and this delayed any move to cut prices before now, the NDRC said in a separate statement on its website, citing comments from an official it didn’t identify.

Gasoline prices were cut to 8,280 yuan ton and diesel prices were lowered to 7,430 yuan, the NDRC said. The upper limit for retail gasoline dropped as much as 3.3 percent and diesel by 3.6 percent.

Refining Losses

Chinese refiners will face losses after the cuts and the government has told oil companies to ensure supply, NDRC said.

“This price cut could continue to squeeze the domestic refining margin for the giant oil duo,” Kwan said. “We estimate that they will lose an average of US$6.5 for every barrel of imported oil refined into fuels.”

Sustained fuel price cuts should help lower China’s Producer Price Index and Consumer Price Index in the winter months, Kwan said.

China adjusts gasoline, diesel and kerosene rates when the moving average of three crude grades comprising Brent, Dubai and Cinta changes more than 4 percent over 22 working days. The government may increase the frequency of fuel price adjustments and change the global crude price benchmarks it monitors, the NDRC said in the statement, without being more specific.

China’s industrial output slowed in August for a second month, giving policy makers more room to pause monetary tightening as the economy cools and a global slowdown threatens exports and jobs.

China is cutting fuel prices as tightness in domestic fuel supply eases. The government reduced fuel-oil import tariffs in July. It also pressured privately held refineries to increase processing, the official Xinhua News Agency said on Aug. 8, citing an unidentified NDRC official.

--Bloomberg News. Editors: Paul Gordon, Ryan Woo

To contact Bloomberg News staff for this story: Bloomberg News in Shanghai at wzhu4@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net


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