China May Cut Fuel Prices by 9%, Shenyin Wanguo Says

By Winnie Zhu

Dec. 8 (Bloomberg) -- China, the world’s second-largest energy user, may cut gasoline and diesel prices next month as it allows energy costs to reflect global crude prices, Shanghai- based Shenyin Wanguo Securities Ltd. said.

The government may cut fuel prices by 600 yuan ($87) a ton, or 9 percent, on Jan. 1, analysts Yu Chunmei and Zheng Zhiguo said in a research report today. Shares in China Petroleum & Chemical Corp. and PetroChina Co. gained as some investors took the view that the new pricing system may boost earnings for the nation’s two biggest refiners.

China is accelerating plans to cut fuel prices and reform the pricing mechanism as the economy slows and oil costs decline, the National Development and Reform Commission, the top economic planner, said Nov 20. Factory gasoline and diesel prices will be set based on global crude prices, domestic refining costs, taxes and “appropriate profit” for refiners, the commission said last week, without elaborating.

“Although China hasn’t defined what the reasonable profit margin is, refiners should be happy that the new pricing mechanism should prevent a repeat of their massive refining losses suffered earlier this year,” Gordon Kwan, head of China Energy Research at CLSA Ltd., said in a note to clients today.

A ceiling will be imposed on retail fuel prices, the commission said. China currently allows adjustments of as much as 8 percent from the benchmark price.

Shares Rise

China announced a plan last week to increase the consumption tax on oil products and abolish fixed road maintenance fees next year to conserve energy use. The gasoline consumption tax will rise to 1 yuan per liter from 0.2 yuan and the diesel levy will increase to 0.8 yuan from 0.1 yuan from Jan. 1, the government said Dec. 5.

Sinopec, as China’s largest refiner is known, rose 8.9 percent to HK$5.12 at 3:28 p.m. in Hong Kong trading, the biggest gain since Oct. 30. PetroChina Co. gained 6.7 percent to HK$6.67, the biggest gain since Nov. 10.

Chinese refiners lost money in the second half last year and earlier this year as crude prices reached a record in July and the government capped fuel prices below costs, discouraging oil processing and leading to a nationwide fuel shortage. The country is speeding up reforms on fuel pricing to bring it in line with global crude costs, the commission said last month.

Fuel prices were last cut in January 2007, when oil was at about $53 a barrel. Benchmark oil prices in New York have slumped around 70 percent from a record in July as the global economy slowed on the credit crisis. China increased fuel prices in November 2007 and in June, when gasoline and diesel were raised by 18 percent.

With crude trading at less than $50 a barrel, there’s still room to reduce domestic fuel prices by about $12 a barrel, the Shenyin Wanguo analysts said.

The Chinese economy expanded 9 percent in the third quarter. Industrial production grew at the slowest pace in six years as the export market dried up.

To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net.