The Wall Street Journal: Sinopec’s Move To Trim Gas Prices Rekindles Debate

By DAVID WINNING
June 12, 2007; Page A12

BEIJING — China Petroleum & Chemical Corp.’s decision to cut the cost of gasoline at some filling stations in Guangzhou city has reignited the debate about market pricing in China.

Sinopec, as the company is known, trimmed pump prices 10 fen, or 1.3 cents, per liter at six gasoline stations in Guangzhou more than a week ago in an apparent attempt to grab market share from rivals including PetroChina Co., Xinhua news agency reported. Sinopec’s move mirrored March price cuts in Beijing and Guangdong by PetroChina, a step some industry experts said might have boosted those stations’ fuel sales by as much as 33%.

Instances of price competition are rare in China due to government-set caps on the cost of gasoline and diesel fuel. At times of high oil prices, Sinopec and PetroChina tended to keep pump prices close to the ceiling to maximize returns and offset any refining losses.

Paul Ting, principal of Paul Ting Energy Vision, said prior to the March cuts by PetroChina, changes to pump prices were made in unison by the two companies. But China’s oil-market regulations allow fuel retailers to adjust their prices within a range of 8%, giving them scope to take each other on over price.

Victor Shum, a Singapore-based analyst at consultancy Purvin & Gertz Inc., said he believes Sinopec’s unilateral decision to cut prices likely will be an isolated move and questioned whether policy makers had the appetite for the country’s two biggest oil companies to square up over price.

He added: “I believe, with more players in the market, there will eventually be some price competition.”

China’s potentially huge oil-products market has attracted a number of foreign companies, including BP PLC, Royal Dutch Shell PLC and Total SA, which have built joint-venture service stations with Chinese companies. Malaysia’s Petroliam Nasional Bhd., or Petronas, and Kuwait National Petroleum Co. also plan to build service stations in China’s southern province of Guangdong, a person familiar with the plans said.

Across China, Sinopec is the biggest filling-station operator, with a 28,800-strong estate at the end of last year. It is the dominant company in Guangdong’s oil-products market, with 2,500 service stations compared with PetroChina’s 500 stations.

Bradley Way, a Beijing-based analyst at BNP Paribas, said a fully fledged price war was unlikely as oil retailers aren’t making much profit from selling fuel. He estimated that between 88% and 93% of pump prices reflect retailers’ costs of purchasing the fuel.

Retailers also have to shoulder the burden of maintaining the filling-station infrastructures and handling the oil products on site.

Companies wanting to boost their retail businesses’ profitability would be better off focusing on the quality of their network. Sinopec has already taken steps in this area, increasing like-for-like sales by 11% last year after closing stations in rural areas where car use is low, and opening more in big cities.

Write to David Winning at [email protected]

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