China raises fuel prices to trim demand

Last Updated: Sat, Feb 19, 2011 16:30 hrs

China will raise fuel prices by 4-4.5 percent from Sunday to fresh highs, the government announced, the first increase since December, to dampen demand and cushion refiners from high crude prices.

"Excessively fast growth in oil consumption is exceeding the tolerance capacity of our country, economically and environmentally," the National Development & Reform Commission (NRDC) said on its website

"Therefore, there is an urgent need to give play to the role of price levers for adjustment and guidance, constraining the excessively fast growth of oil consumption," NRDC said.

The increase, in line with market expectations but smaller than the gains in crude costs, would help lift refiners' margins as benchmark Brent hovers above $100.

But the move was not likely to signficantly curb Chinese fuel use, which rose 12 percent last year.

The modest fuel hike came as China battles a drought that requires more diesel for irrigation pumps and as transport picks up after a lull during the Lunar New Year break.

"Demand will barely budge...The key reason for the price increase was the worry that supplies would dwindle as margins were pinched and as some refineries started maitanences," said a fuel marketing official with Sinopec Corp, Asia's largest refiner.

The government will raise the retail ceiling for gasoline and diesel by 350 yuan ($53) a metric tonne, and jet fuel prices by 340 yuan per tonne. China last raised fuel prices by about percent on Dec 22.

"Experiences in recent years have told us that by suppressing prices it would discourage refiners to produce or import and lead to shortages and queuing at petrol stations," NDRC said.

The agency said the price move has been delayed and that the increases fell short of the rises in global crude prices to which Chinese fuel prices have been linked since Jan 2009, due to rising inflation concerns.


The hike will also boost production at smaller, local refineries, known as "teapots", which the NDRC said make up 10-15 percent of China's total capacity.

"These refineries don't have upstream crude productions, leaving them exposed to losses in the refining business," the NDRC said.

The government will continue handing out subsidies to grain farmers, fishermen, public transport operators and taxi drivers, the agency said.

Under a crude cost-plus fuel price scheme started in 2009, China raised prices three times and cut once last year, lifting prices a total of 9 percent.

A 22-day moving average price of Brent, Dubai and Cinta crude oils, on which China's fuel pricing is based, has gained more than 10 percent since the last adjustment on Dec 22, far above a 4 percent mark that justifies a fuel price hike.

Since 2009 China has had in place a domestic fuel price system that guarantees a fixed profit margin for refiners when oil prices are below $80 a barrel, which has lead to a boom in refinery production and fuel exports.

But the government can pare refining margins when oil prices are above that level and even freeze the scheme when oil surges above $130. It also retains the final power to adjust prices itself, taking into account other factors like demand and supply or inflationary pressures.

For a table of the increases.

($=6.57 yuan)

(Reporting by Michael Martina and Chris Buckley, editing by William Hardy)

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