Bloomberg News

China May Impose Additional Fuel-Pricing Changes This Year

October 12, 2011

(Updates with Sinopec shares in sixth paragraph.)

Oct. 12 (Bloomberg) -- China, the world’s biggest energy user, may announce changes to its fuel-pricing system by the year-end and adjust gasoline and diesel tariffs more regularly to curb consumption growth, Sanford C. Bernstein & Co. said.

Oil companies may also be allowed to make price adjustments within a range set by the government, Hong Kong-based Bernstein analysts led by Neil Beveridge and Michael Parker wrote in a report today.

China introduced a mechanism in December 2008 allowing the National Development and Reform Commission, the top economic planner, to adjust fuel prices when benchmark crude grades fluctuate more than 4 percent over 22 working days. Controls on fuel tariffs mean refiners including Sinopec, as China Petroleum & Chemical Corp. is known, cannot pass on increases in global crude costs to consumers.

“If oil companies are allowed to make changes, it would be a major step forward in achieving transparency and eliminating losses from the system,” the analysts said. “Sinopec will be the big winner when these reforms are announced.”

China, which controls fuel prices to curb inflation, raised tariffs by about 10 percent in the first half while crude in New York averaged 26 percent higher from a year earlier. PetroChina Co., Asia’s biggest company by market value, urged the government to allow oil companies to earn “reasonable” margins after second-quarter profit missed estimates.

Inflation Concerns

Sinopec, China’s largest refiner, rose 1.8 percent to HK$7.22 in Hong Kong trading as of 11:14 a.m. local time, while PetroChina was unchanged at HK$9.02. The benchmark Hang Seng Index advanced 0.3 percent.

The government may increase the frequency of fuel-price adjustments and change the global crude price benchmarks it monitors, the NDRC said on Oct. 8, without being more specific.

The government cut fuel prices for the first time this year on Oct. 9 after crude oil costs fell. The NDRC last reduced prices in June 2010, and since then, has increased them four times, by about 20 percent.

“China hadn’t raised fuel prices enough” when crude climbed to high levels in late April and early May because of inflation concerns, the NDRC said. The consumer price index rose 6.2 percent in August, near the three-year high of 6.5 percent in July.

Tax Regulations

Premier Wen Jiabao called on local governments to step up efforts to conserve energy and reduce carbon emissions, saying the current situation is “rather severe,” according to a report by the official Xinhua News Agency on Sept. 28.

China will extend a value-based tax on sales of oil and natural gas nationwide starting next month to help conserve energy, the government said on Oct. 10.

The tax, ranging from 5 to 10 percent of sales, may crimp the earnings of Chinese oil and gas producers. Possible changes to the windfall tax will likely offset the impact of the new resource tax, the Bernstein analysts said.

The windfall tax, introduced in 2006, charges oil companies at a rate of 20 to 40 percent of crude sales when oil is above $40 a barrel. China is due to raise the threshold at which the tax is paid this year, PetroChina Chairman Jiang Jiemin said on March 14, citing a government plan. The adjustment will be made when China introduces a nationwide resources tax, Jiang said.

“We expect the starting point of the windfall tax to be increased by $10 to 20 a barrel,” the Bernstein report said.

Crude in New York rose to a 30-month high of $114.83 a barrel on May 2 and has since declined to about $85.

--Jing Yang. Editors: Ryan Woo, Andrew Hobbs.

To contact the reporter on this story: Jing Yang in Shanghai at jyang251@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net.


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