v2.5.99
BEIJING GIVETH

China’s Sinopec owes its stellar first-half performance to a regulatory tweak

China Petroleum & Chemical Corporation, better known as Sinopec, is finally making a profit from refining after years of losses. While analysts have credited the company’s cost-cutting efforts, its success is in part due to a change in fuel-pricing regulations.

Beijing retains tightfisted control over prices of refined oil in China for the same reason that many governments do—the influence these prices have on inflation and social sentiment. Until March, prices for refined products followed a rigid system that raised or lowered them only if international prices changed more than 4% over the course of 22 days. The inflexibility of that system meant that when international prices of crude oil rose or fell sharply—as they have been wont to do given recent unrest in many oil-producing countries—China’s refiners lost out because domestic prices of refined products did not react fast enough.

Then Beijing moved the goalposts. The March adjustment to regulations (paywall) more than halved the 22 day period to 10 and changed the 4% condition to include any price fluctuation of over 50 yuan ($8.17) per ton, adding a proviso that should a crash or spike require it, prices could be changed at any time. Beijing has raised prices several times this year alone, boosting Sinopec’s profitability, but will be careful to maintain a careful balance—it’s a sensitive issue (paywall) for consumers.

Sinopec is just one of China’s petro-giants benefiting from the change. The company’s net income climbed 24% in the first half (paywall) of this year, to 30.28 billion yuan ($4.95 billion). Its refining arm raked in 213 million yuan, a big improvement on a previous 18.5 billion yuan loss. PetroChina, Sinopec’s smaller cousin, posted 5.6% growth in net income for the first half.

The move towards market liberalization might tempt China-watchers to call it another step towards a market-based economy. But that’s probably wishful thinking. Jianju Tu, an energy and climate expert at the Carnegie Endowment for International Peace, told Radio Free Asia in April that “the price of energy is considered to be tied to social stability, so it’s very difficult for the government to entirely give up its pricing power” because it doesn’t want to lose a method of appeasing China’s fuel users.

For Chinese refiners like Sinopec, government control over prices does at least provide a certain security in the event of a fuel price crash, and a pricing squeeze has encouraged efficiency—never a bad thing in state-owned entities. In the next four years, China looks set to become the world’s number one importer of crude oil, making refining profitability an even more important issue.

Jake Maxwell Watts

Powered by WordPress.com VIP
Follow

Get every new post delivered to your Inbox.

Join 19,604 other followers