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June 20, 2008
china raises gas/diesel prices
Lehman says it was a surprise, but not to me. With these prices, and the skewed demand picture subsidies put on the oil market, these subsidies are not long for this world in non- oil producing states. China follows Indonesia. I expect civil unrest as in Indo. Look out Olympics.
In another surprise move, China's NDRC said that it will adjust ex-refinery benchmark prices of gasoline and diesel by Rmb1,000/tonne and that of kerosene by Rmb1,500/tonne from Friday 20th June. The previous price increase of Rmb500/tonne for these three products was on Nov 1.
The price increase translated to an increase of US$19.4/bbl for gasoline
(+16.7%) and US$17.11/bbl (+18.1%) for diesel and US$28/bbl (+25%) for kerosene. However the price hike is insufficient to alleviate the current refining losses as international crude oil prices have surged even more +52% since Nov 1 07 to a high of US$137/bbl (Jun 12). We estimate that Sinopec's breakeven crude cost is US$105/bbl while Petrochina's crude cost is around US$85/bbl.
According to the government, this step was initiated by the significant losses incurred by the domestic refineries to an unacceptable level whereby most independent refineries had to stop production either fully or partially. The problem had caused a demand/supply imbalance in the domestic market. In order to ensure sufficient domestic oil product supply, the government decided to raise the domestic oil product prices by a "reasonable" level.
Average ex-refinery gasoline and diesel prices are raised from Rmb5,980/tonne and Rmb5,520/tonne to Rmb6,980/tonne and Rmb6,520/tonne respectively. Maximum prices allowable which is + 8% from this benchmark prices will bring domestic gasoline and diesel prices to Rmb7,538/tonne and Rmb7,042/tonne respectively.
The NDRC has decided not to raise the ex-refinery natural gas prices.
We think that this is positive news for both Petrochina and Sinopec since we believe the market expected that there would be no price increases in the near term due to escalating CPI. We believe this is a necessary step as the gap has widened significantly between crude cost and product prices. We expect PTR and SNP share prices to react positively in the very near term to this surprising action by the government. Furthermore, international crude oil prices declined on this news which also helps lower refiners' raw material costs.
However, this price hike would probably only give the stock a temporary boost. An ad hoc price hike is no longer good enough for the market, in our view, because it has been a temporary solution that has been slow to react to changes in cost. For sustainable outperformance, we believe that the market would want permanent deregulation of product prices which could be at least a year away.
We maintain our 2-EW ratings on both Petrochina (857.HK TP HK$11.70) and Sinopec (386.HK TP HK$8.00).
Regards,
Cheng Khoo
+852 2252 6180
Posted by Martin at June 20, 2008 12:07 PM
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