THE recent sharp tumble in international crude oil prices is set to give an earnings boost to China's mainland money-losing refiners, but the fate of Sinopec Corp and PetroChina Co is still at the mercy of state policies.
Some experts said the sharp fall in crude had provided China's policy makers with a golden chance to reform the fuel pricing system, which is now designed to shield low-income groups while also causing a supply shortage.
Market observers said China's refining business could turn profitable when crude falls below US$95 a barrel.
Crude contracts in New York rebounded as much as US$3.57 yesterday to around US$95 a barrel after losing more than US$10 in the previous two days against a record level of more than US$147 seen in July.
In London, the Brent crude also tumbled below US$90 mark on Tuesday before bouncing back to around US$93 yesterday.
"The reform of China's fuel pricing system would enter a crude stage if crude could stay below the US$100 level for a longer period," said Han Xuegong, senior consultant at China National Petroleum Corp, the parent company of PetroChina, in Beijing.
China's policy makers have vowed to reform its energy pricing sector by linking domestic gasoline and diesel prices more closely to crude changes. But this would only happen when crude prices were not too high, which would trigger social unrest, or too low, which would not be accepted by oil majors, Han said.
In addition, as China's consumer price inflation weakened to a 14-month low in August, market watchers said the central government could grab the opportunity of falling inflation to expedite reform in the energy sector, including power prices.
No immunity
In the past, the central government has instituted moderate fuel price hikes while still giving out sizable government grants to Sinopec to keep both drivers and refiners happy.
Analysts said they expected the steep decline in crude, which echoed the recent global financial woes, could now go further.
"The current rendition could be even more severe, as the economic woes have originated in the United States and show signs of spreading among OECD (Organization for Economic Co-operation and Development) members," said a Sun Hung Kai Financial report.
China and Asia would not be immune to a slowing global economy, and its demand would also waiver sooner or later, it said. The report pointed out that the only visible medium to long-term support for crude prices was production cuts from Organization of the Petroleum Exporting Countries.
"Although OPEC wants to put the floor for crude oil at US$100 a barrel, we believe upside potential will be limited by continued declines in demand in the following months," it said.
The situation was also evidenced by China's import data. According to Customs, the mainland imported 13.7 million tons of crude in July, marking the second straight month of decline and an on-year drop of 7 percent, as crude inventories prepared for the Olympics were now being slowly depleted.
While the latest crude tumble depicted an earnings downside for global energy stocks, it would mean earnings upsides for Sinopec and PetroChina, which have major exposure to the refining sector that's subject to central government's price control, according to Hong Kong-based brokerage CLSA.
The biggest question for the earnings of Sinopec and PetroChina now is how the central government is prepared to adjust its subsidy policies with lower crude prices.
In an effort to keep the market well supplied amid soaring crude prices, the central government has given PetroChina and Sinopec, Asia's No.1 refiner, a 75-percent rebate on the value-added tax they pay on crude imports during the second quarter.
Sinopec Chairman Su Shulin has reportedly said the company still enjoys the VAT rebate in the current quarter, albeit smaller.
Policies for the fourth quarter are still not clear.
"The refining business at Sinopec and PetroChina is getting back in the black, but our concern is that the central government may lower fuel prices if crude keeps falling and this would be the biggest negative to the two companies," Wang Weigang, an analyst at Northeast Securities, wrote in a note.