China fuel pricing reform to benefit Sinopec, PetroChina – Fitch

03 April 2013 10:05  [Source: ICIS news]

SINGAPORE (ICIS)--China’s recent decision to adopt a new petroleum product pricing framework is expected to benefit domestic refiners Sinopec and PetroChina, as the reform allows greater pricing flexibility, Fitch Ratings said late on Tuesday.

China's National Development and Reform Commission (NDRC) announced on 27 March that it would adjust official fuel prices based on the 10-working day moving average of a basket of international crude prices exceeding CNY (yuan) 50/tonne ($8/tonne).

Previously, the NDRC adjusts prices based on a 22-working day average exceeding 4%.

“As of the result of the reform, Fitch now expects Sinopec to turn a profit in its refining business and PetroChina to significantly narrow its refining losses in 2013,” the ratings agency said in a statement.

The two companies had incurred heavy losses in their refining business last year, largely because of their “inability to pass on high feedstock costs to end-users during periods of oil price inflation”, Fitch said.

Sinopec’s refining losses last year totalled CNY11.4bn, while those of PetroChina’s were at CN33.7bn, the ratings firm said.

“The new mechanism will allow for price changes to reflect global market adjustments in a more timely manner and help improve refining margins,” Fitch said,

“NDRC, however, retains the discretion to intervene if there is exceptional volatility in the international oil market or to manage domestic inflation,” it said.

PetroChina is expected to continue incurring losses on its gas operations this year, Fitch said, citing that the company continues to import large quantities of expensive imported piped gas and liquefied natural gas to meet China’s growing demand for natural gas, Fitch said.

While Fitch expects China to eventually issue reform on its natural gas pricing scheme and adopt a more market-based approach, a nationwide implementation would be gradual, it said.

“Currently, a more market-based pricing scheme is being tested in Guangdong and Guangxi provinces. However, pricing reforms across China will take time to implement and be gradual,” it said.

PetroChina incurred a loss of CNY 2.1bn for its natural gas & pipeline operation last year compared with an operating profit of CNY15.5bn in 2011, Fitch said.

($1 = CNY6.20)

By: Pearl Bantillo
+65 6780 4359

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