Sinopec to hurt if China reimposes fuel price ceilings - Fitch

27 August 2010 10:20  [Source: ICIS news]

SINGAPORE (ICIS)--A possible re-imposition of fuel price ceilings in China amid the volatile crude market may hit the ability of state-owned petrochemical giant Sinopec to churn in good profits, Fitch Ratings said on Friday.

“Fitch expects the Chinese government to re-impose price ceilings should global crude oil prices rise beyond acceptable thresholds, hence, increasing the risk of margin squeezes,” it said in a statement.

Sinopec’s first-half refining margins declined 6 percentage points year on year to 2.8%, while its chemical margins fell 7.1 percentage points to 10.1%.

China had adopted in January 2009 a fuel pricing mechanism that allows it to adjust domestic prices according to movement of crude values in the international markets. But with economic growth slowing down, the country may not allow domestic fuel prices to move up too much.

Fitch said the Chinese company’s stand-alone credit profile is constrained by its dependence on third-party crude oil supplies and limited pricing power in the refining segment.

It also cited Sinopec may face deterioration of financial profile due to significant capital expenditure and debt-funded acquisition of overseas assets.

Notwithstanding the risks, Fitch affirmed on Friday the “A-“ rating for Sinopec with a “stable” outlook.

"Sinopec's ratings incorporate its strong links to the Chinese sovereign resulting from its 75.84% ownership by state-owned China Petrochemical Corporation,” said Fitch Asia-Pacific energy and utilities team director Ying Wang.

The ratings also reflect the strong government influence on the company’s pricing of refined oil products and in its strategic importance as China's largest producer, distributor, and retailer of refined oil and petrochemical products, Ying said.

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By: Pearl Bantillo
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