China fuel price rise may bolster consumption

BEIJING Thu Jun 19, 2008 6:16pm EDT

1 of 6. A customer pays a petrol station attendant after filling his car's petrol tank before the midnight deadline for price rises in central Beijing June 19, 2008.

Credit: Reuters/David Gray

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BEIJING (Reuters) - Beijing's surprise increase in diesel prices will make truckers grumble, but for the first time in weeks they may be able to fill up without rationing or queues, and the easier supply of oil will likely bolster consumption.

The government said on Thursday it would raise low state-set caps on fuel pump prices by around 1,000 yuan a tonne, or nearly 20 percent, the first rise for nearly eight months and the steepest one-off hike ever.

Oil markets fell on the news as traders bet it might help curb soaring demand, as Chinese drivers already squeezed by high inflation looked to cut back on spending.

But they may be underestimating the appetites of the newly rich middle-classes, government plans to protect the poorest with direct subsidies, and most of all the role of state-owned refiners who carry much of the burden of current policy.

"Perhaps somewhat counter-intuitively, it's not bearish," said Kevin Norrish at Barclays Capital in London.

"At the margin it may help to support demand growth for diesel and gasoline as it alleviates shortages," he added.

China's oil majors PetroChina and Sinopec are obliged to sell fuel at often unprofitable state-set levels and get only ad-hoc subsidies to help balance their books.

Fuel prices had been unchanged since last November even as crude climbed by around $40 a barrel, so plants faced feedstock prices far above break-even levels. Many cut output as they plunged into the red, causing widespread shortages.

Before the increase there were queues and dry pumps across the capital, and a tour bus driver was spotted begging assistants at one service station, rumored to offer supplies at illegally high prices, to let her buy at whatever cost.

By restoring refiners to financial health, the increase will encourage them to ramp up production, and the new supplies of fuel will unleash suppressed consumption growth.

"This price increase gets the refiners pretty close to profitability, and throughput should increase in the months ahead," said Trevor Houser, analyst at Rhodium Group in New York.

"Don't expect much demand destruction...certainly not enough to outweigh the increase in output from improved economics."

TOO RICH TO BRAKE

Beijing has pledged subsidies for the most vulnerable users, including farmers and fishermen, which should support their consumption. Economists say this is a better way to spend government money than handing cash to refiners.

"The low prices benefit everyone, including rich people that can afford high prices," the World Bank said in a report released before the increase, advocating a rapid raise to support energy efficiency policies.

But there is a second group of fuel users whose demand will likely also be undented -- the newly rich.

The fondness for powerful but inefficient sports utility vehicles (SUVs) now appears to be on the wane in the West as crude spirals towards $140 a barrel, and the credit crunch bites.

But China's middle classes are taking to its already crowded roads with a vengeance, and those who can afford to are in SUVs.

Sales of the gas guzzlers rose more than twice as fast as car purchases last year, up 50 percent to 357,400 units, compared with a 22 percent rise in car sales to 6.3 million units.

Even the surprise hike is unlikely to coax the nouveaux riche to take their new toys off the road.

The speed of economic expansion outweighs much of the rise in oil prices, and depreciation on cars also means that once bought, owners like to drive them even if fuel is pricey.

"I don't think too much about oil prices, the main thing is the car's performance," said Mr Chao, a 52-year-old businessman shopping for a second car in an upmarket Landrover showroom.

"A good car can upgrade your quality of life, reflect the excitement of being alive."

($1=6.882 Yuan)

(editing by James Jukwey)

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