ONCE the largest gasoline exporter in Asia, China is now grappling with its new status - as a net importer - for the first time.
Analysts said this could continue unless domestic refining margins improve, or if the government removes the value-added tax rebates on fuel imports it has given to Sinopec and PetroChina while introducing new measures to compensate.
China has become a net gasoline importer as the domestic refining sector started to struggle with crude oil prices that have risen more than 40 percent so far this year. China hasn't raised fuel prices since November, leaving oil processors deep in the red.
Many independent refineries, estimated to account for around 20 percent of China's total capacity, have been forced to halt processing or run at minimum capacity to avoid losses.
Meanwhile, demand is rising with the summer peak season and the aftermath of the Sichuan earthquake on May 12. The central government also wants to ensure steady supplies ahead of the Beijing Olympics by stockpiling fuel.
So now the burden mainly falls on the shoulder of state-owned oil duopoly Sinopec and PetroChina, which have boosted processing, added imports and brought new projects on stream - despite losing money - to fulfill their social responsibility.
The nation imported 338,572 tons of gasoline in May while exporting only 160,000 tons. And the two state firms were expected to import another 600,000 tons of gasoline and 1 million tons of diesel this month to set fresh highs.
Sinopec this week officially started its major 10-million-ton-a-year Qingdao refinery, or about 200,000 barrels per day, in Shandong Province, which could help China reduce costly fuel imports. The company, Asia's largest refiner, said the plant is losing money.
On the government's part, it has given rebates on the 17-percent value-added tax paid by Sinopec and PetroChina on their gasoline and diesel imports to encourage purchases in the current quarter, and directly subsidized the two companies to boost refining activities.
Sinopec's senior vice president Zhang Jianhua has reportedly said the tax rebates may be extended to the third quarter. Even so, some analysts said the refined oil-import business is still unprofitable.
Many analysts said the government can still afford the payouts for a while, so it may raise fuel prices after the August Olympics.
Inflation fears
Ha Jiming, an economist at China International Capital Corp, said if the government could raise fuel prices by 50 percent in mid-2008 to cover refining losses, inflationary pressure for 2009 could be eased.
The government has long promised to improve the pricing mechanism to solve the distortion of prices in China's oil market.
Shares in Sinopec and PetroChina surged yesterday after Zhang Xiaoqiang, a deputy director of the National Development and Reform Commission, said China intended to make its energy prices better reflect the market but will act with prudence due to concerns about inflation.
Xinhua news agency said the government will improve the pricing of refined oil products as well as natural gas at a proper time.
A week earlier, shares in Sinopec and PetroChina had been hit after NDRC Deputy Director Zhang Guobao said in Japan that China's fuel price controls are conducive to social stability.
He said accelerating pricing reforms would worsen the impact of rising crude oil prices on farmers. Zhang's comments dented hopes that fuel prices would be raised in the short term.
"Remarks by officials haven't included much concrete information so far," said Orient Securities analyst Wang Jing. "But the market is nervous about any speculation with regard to a possible price rise."