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- Fuel price hike only slows refiners' loss
Date: 2-Nov-2007 Sources: (Shenzhen Daily)
THE government's unexpected fuel price rises Thursday were a tonic for loss-making refineries but it was not enough to put their operations back in profit, analysts said.
The government raised the prices after fuel shortages spread across the country, forcing authorities to introduce rationing in the worst-hit areas. Industry experts said refiners had undersupplied the market because low State prices had forced them to bear huge losses, while crude oil prices were approaching an all-time high.
For fuel suppliers, led by top Asian refiner Sinopec, the price hike will slow the bleeding but - if crude oil prices say high - they will remain in the red.
'Refiners will only lose less,'said Na Liu, a China commodities analyst at Scotia Capital.
'Without the hike, on average, Chinese refiners need crude to be below US$70 to break even on operating margins. With the hike, Chinese refiners need crude to be below US$80 to break even.'
U.S. crude oil rose above US$95 a barrel in late trading Wednesday and traders have increased their bets that it will soon hit a record US$100 per barrel.
Crude oil's rise has left Sinopec facing deeper and deeper losses from refining and some analysts had predicted it would receive a subsidy for the third year running to compensate it.
Others expected the government to force it to accept losses, although that could have compromised its aggressive expansion plans. Keeping fuel prices low also encourages people to smuggle cheap fuel out of the country or to sell on the black market at non-State prices.
'Despite the price increase, we estimate domestic refining margins would still be below break-even in November. If crude oil prices stay around US$90 per barrel, margins should be -US$3 to -US$5 per barrel in December,'Goldman Sachs analyst Kelvin Koh wrote.
'Unless crude oil prices fall to the low US$80s, the National Development and Reform Commission would likely need to increase prices by another 15 to 20 percent in early 2008 if it wants to bring margins to above break-even levels.'
Sinopec's chief financial officer Dai Houliang said this week the company was under increasing pressure to secure supplies for the market as some independent service stations had stopped selling fuel.
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