The hot China theme these days is: The country is addicted to centrally planned investment, and it’s all coming off the rails.It’s something UBS’ Andy Lees has been talking about. It’s what the Ghost Cities story is all about.
To that effect, we wanted to publish a recent anecdote from the IEA about Chinese energy policy, and its failure on multiple levels.
The key thing to watch in the passage below is how at each state of Chinese central planning — whether its refiner pricing, production demands, export controls, attempts to mollify Chinese truck drivers — there’s a knock-on effect, and some obligation to fix some other problem.
China’s oil product price policy currently faces a paradox. On the one hand, wholesale or ‘guidance’ prices are too low to guarantee positive refining margins; on the other, retail prices have increased to an extent that is reportedly fostering localised social discontent.
Indeed, despite three government‐mandated price hikes since last December, domestic refining margins have become negative in recent months, judging by the 1Q11 financial results from state‐owned Sinopec and PetroChina. The former posted losses of roughly $89 million on an average throughput of 4.3 mb/d, while the latter (which operates less complex refineries) lost $945 million on an average throughput of 2.8 mb/d – implying refining margins of ‐$0.23/bbl and ‐$3.75/bbl, respectively. Small ‘teapot’ refineries, which have traditionally helped to fill the supply gap, are also facing poor economics, with many reportedly shut down or running at some 30% of capacity, notably in Shandong province.
The recent price correction, albeit welcome, is unlikely to help refiners much, since domestic price adjustments have lagged international levels. Moreover, state‐owned refiners cannot seek better downstream returns by exporting most of their output, as the government appears determined to avoid domestic oil product shortages and to combat hoarding, both of which have been recurrent over the past years. In fact, both companies have been instructed to hike runs and maximise gasoil output, as demand picks up seasonally in spring – and the more so since teapot refiners are not producing enough off‐spec product to supply farmers and fishermen.
In terms of policy remedies, increasing domestic prices sufficiently to guarantee reasonable refining margins – or alternatively, fully deregulating the market – is probably not an option at this point, given stubborn inflation (which hovered above 5% in both March and April). Subsidising refiners directly or cutting the fuel consumption tax, as refiners have demanded, are other options – but neither has so far been implemented.
Meanwhile, in late April Shanghai was the theatre of an unprecedented three‐day strike by truck drivers. The protests in several areas of the city’s large port – marred by police clashes, according to international media sources – were reportedly triggered by high gasoil prices, which compounded the effects of already mounting operating expenses. The unrest ended when the local government ordered container shipping centres to eliminate or reduce a number of fees and tolls. In a related move, the Shanghai authorities have also announced they are considering financial assistance for taxi drivers, who have not protested so far.
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