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China's refined product price mechanism,Sinopec and global oil price

One of a widely discussed topic in recent days is the gas price increase in China, and how NDRC ambushed us with two hikes a month, to me, there’s no right or wrongs, or at least it’s not my decision to make, there’s reality and implications, which I’m interested in.

 

But first to be fair, if we ever dare to compare our gas price to America, then the answer is firmly positive – Higher.

 

Here I quote a report summary released by some expert in Sinopec in the news, “July 6, the maximum retail price of No. 90 gasoline is 7543.67 yuan/ton, which includes the value-added tax 1096.09 yuan/ton, consumption tax is 1388 yuan/ton, urban construction tax 248.409 yuan/ton, the tax accounted for 36.22%. Gasoline price excluding taxed is 3.47 yuan/L, 13.03% lower than in the United States”.

 

Let’s step back and say if the numbers are correct, cause they're so honest, simple formula, VAT = (price - cost) * value added tax rate (let’s use 33% extreme for SOEs?)
1096.09 yuan / ton = (7543.67 yuan/ton - costs) * 0.33
Cost = 4222 yuan / ton
One tonne of gasoline is equivalent of about 1378.3566 liters
Well, a liter of gasoline production is 3.06 yuan / liter


I’m not so familiar with the tax stuff, anyone willing to share? An analyst told me they are charged with higher VAT than others, anyway, if you use a rate like 17%, the cost number is even more absurd, looks to me it’s impossible for them to lose anything at all at such low cost. Plus some anecdotal evidence that crude oil imports price in China is way below the WTI price, some say China is the largest low grade oil importers in the world, so you can imagine the discount…(haha, disclaimer, I've no data, I doubt anyone has it)

 

What interests me is the implications of the new price mechanism on Sinopec and oil price.

 

First, beware of the 22 days manipulation rule

 

4% price movement in either direction will trigger an adjustment, they’re talking about trading days, so 22 days is a month, 1/12 of a year, Sinopec produced 29 mn tons of gasoline and 69 mn tons of diesel for 2008, so roughly 98 mln tons a year, 8.2 mn tons a month, roughly I use 6000 RMB/ton as gas/diesel average, we’re talking about 8.2mn*6000=49bln revenue a month, just for Sinopec, and I’ve ignored their marketing portion(buy others' and sell) and Petro China etc, total money at stake is multiple of this number.

 

What’s my point? Remember it’s all a money game, June 30th gasoline price increase of 600/ton or about 8.6% up will bring Sinopec 4bln more money a month, how much did Sinopec made in 2008? Answer is 30bln, so you do the math.

 

Now we have a cost/benefit ratio to think about, if the crude price, which is the input for the mechanism, has material effect on the company’s bottom line, then naturally you’d want to manipulate it to make sure price is tilted to your favor.

 

I’m not fond of conspiracy theories, but I think they’ll try to hold crude price for a day at the end of the 22 days rule. So watch out for the crude fluctuations this month end or at every such intervals.

 

You might think, is that exaggerating? Do they have the power to do that? China has been steadily importing crude at magnitude of way over 10mn tons a month, Reuters said China finished first phase of strategic reserve the past 30 months, and second phase is coming, which means, a lot of buying power is waiting on the sideline, of course to manipulate completely is an exaggeration, but place orders at 22 day end and move it up a few percentage points is not mission impossible.

 

Second: Sinopec’s golden age

 

Some accused the mechanism that, the base is too high and if crude hits 140 again, domestic gas price could be ridiculously over 10? Actually, not, the mechanism is really opaque, but the rules says when the crude is over 80, NDRC will reduce the profit margin for the refiners, yes the base is too high, but it won't hit over 10.

 

So think about it, if you believe the crude will fluctuate around 60 to 80, then this is really the golden age for Sinopec, high price/low cost, the longer the better! Outside this range is not good, and I think the experts in NDRC know it, that’s why they made it this way. Re rating is on its way.

 

PS.

Just some thoughts, haven’t written anything for two weeks, feel lazy recently, cold beer and remote control in hand during hot summer night, the outside world seems have nothing to do with me…huh, had a chat with my cousin in California last week, folks there are talking about the IOUs and how the state is getting “terminated” by debt, well, feel bad for Arnold, not easy to be cool in real life…hope they get over it… and nothing get terminated...