July 10, 2012 / 10:47 AM / 8 years ago

UPDATE 1-China in 3rd fuel price cut since May, demand tepid

(Adds NDRC confirmation, details, official comments)

* Gasoline down 4.6 pct, diesel down 4.8 pct from Wed

* China cuts prices by a combined 13 to 14 pct since May

* Squeezes refining margin; fuel demand lacklustre

By Judy Hua and Chen Aizhu

BEIJING, July 10 (Reuters) - China, the world’s second-largest user of fuel, will cut retail prices by around 5 percent from Wednesday, its third reduction in just over two months and a move that leaves refiners in the red but may lure consumers back to the pumps.

Oil demand in China, which still makes up nearly half of the incremental global total, posted its first yearly fall in at least three years in April and edged up just 0.8 percent in May as economic growth slowed.

With effect from Wednesday, the ceiling for gasoline retail prices will be lowered by 420 yuan ($65.9) a tonne and diesel price by 400 yuan, the National Development and Reform Commission said.

The latest cut would bring the reductions to a combined 13 to 14 percent since early May, which came off record highs of about $1.22 per litre for diesel and $1.17 for gasoline.

“Let’s hope for the demand to come back after this cut, so that our tanks won’t be that full,” said an official with a state refiner.

But industry officials were reluctant to predict that the cheaper fuel would spur an immediate rebound in consumption.

“There are few signs yet of a real power shortage this summer, the logistics sector is lackluster...It could mean the real economy is weaker than we thought?” said a fuel marketing official with top refiner Sinopec Corp.


The cut could also deal a blow to refiners such as China Petroleum and Chemical Corp (Sinopec Corp) and PetroChina , who are struggling to recoup crude costs amid a downward spiral in oil prices.

The much anticipated price cut has prompted some analysts to slash earnings outlooks for refining giant Sinopec.

“With China likely to cut domestic fuel prices again next week, we have lowered our Sinopec profit estimates by 38 percent and 5 percent for 2012 and 2013 respectively to reflect worse-than-expected downstream performance in refining and petrochemicals,” Mirae Asset Securities analyst Gordon Kwan wrote last Friday.

Under China’s fuel pricing rules, the government would consider changing fuel prices if a weighted moving average price of three types of international crude oils rises or falls 4 percent, and the interval between two price changes will be at least 22 working days.

In addition, the government will take into account other factors such as inflation, supply and demand.

Fuel price cuts are usually on schedule but price hikes are often postponed or their scale reduced to ease inflation or ease the burden for consumers, leaving refiners to incur losses caused by insufficient hikes in fuel prices.

Beijing asked oil firms to use profits from their upstream businesses to make up for downstream refining losses.

China has been considering changes to the current fuel pricing scheme to better reflect refining costs, with plans to lower the trigger point, shorten the review period and change the composition of the basket of crudes governing pump prices.

A midpoint at which international oil prices are at a reasonable level and can meet the cost of domestic fuel production is a good time to launch the new scheme, an NDRC pricing official said on Monday. (Reporting by Judy Hua and Chen Aizhu;Editing by Clarence Fernandez)

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