SOARING crude oil prices are forcing China to adopt more measures to avoid a supply shortage in the coming high-demand season.
This highlights the dilemma for the government - it has to promise more incentives for refineries while ensuring rising costs are not passed on to consumers.
In its latest move to aid refineries, the Ministry of Finance announced on Tuesday that China will give rebates during the second quarter for value-added tax on gasoline and diesel imports paid by the two state oil companies.
Analysts said the refund of the 17-percent VAT would relieve some losses for refineries, but its impact would be limited compared with other measures being proposed, such as a VAT rebate on crude imports.
"The VAT refund on fuel imports could be the start of a series of policies to ensure supply," China Merchants Securities analyst Qiu Xiaofeng said in a research report. "International crude rates are at super high levels while the government has to tame inflation. In this scenario, tax adjustment is one way if you don't want to raise fuel prices and don't want to see fuel shortages and hefty refining losses."
Refunds
Under the tax break, China National Petroleum Corp will get a refund on 500,000 tons of gasoline imports and 1 million tons of diesel shipments from April 1 to June 30. China Petrochemical Corp, or Sinopec, is allowed a quota of 500,000 tons of gasoline imports and 1.5 million tons of diesel imports for the tax break in the same period.
Based on current international market prices, Sinopec could save 2.4 billion yuan (US$343.2 million) and CNPC 1.8 billion yuan if both use up the quotas, according to a China International Capital Corp report.
But CNPC and Sinopec are not likely to fully use the quotas as analysts and company officials said even with the rebate, imports may still unable to generate profits.
"The policy would help us, but cannot solve the problem," said a Sinopec official who declined to be named. "I don't think the quotas can be fully used, as imports are still losing money at this level."
Sinopec's listed unit, Sinopec Corp, posted a loss before interest and taxes in the refining business of 10.45 billion yuan last year, although it was granted a government subsidy of 4.9 billion yuan. It was the third consecutive year the top Asian refiner has received state subsidies to compensate for refining losses.
The listed Sinopec also got a 7.4 billion yuan handout for the first quarter this year, underscoring the widening gap between capped domestic fuel prices and soaring crude prices, which yesterday struck a new record high of above US$114 per barrel.
Tax cuts
Qiu said he expected that the government may announce a plan by the end of this month to slash by three-quarters the 17 percent VAT paid by Chinese companies on crude imports. PetroChina, CNPC's listed unit, has lobbied the government for refined fuel price rises and tax rebates for crude imports.
Another proposal is to raise the starting level of a windfall levy on crude sales introduced in 2006. Oil produced and sold in China is subject to a tax of 20 to 40 percent on the portion of the price that is above US$40 a barrel. To raise the benchmark may be on China's agenda in the second quarter if crude remains above US$100 per barrel, Qiu said.
The adjustment, if adopted, will especially benefit PetroChina, the largest oil producer in Asia, which has lobbied the government to raise the starting level of the levy.
"These measures lower the possibility of another fuel price rise in the near term, but as to how they will affect corporate earnings, it's up to when the policies are announced and how big the degrees are," the CICC report said. China's consumer price index, a key indicator of inflation, rose 8.3 percent in March, near an 11-year high.
China last raised fuel prices in November last year, after a diesel shortage hit many parts of the nation late last year when crude soared over US$90 a barrel. The shortage was due to refineries cutting back production and some pump stations hoarding products. But the price rises of 9 percent to 10 percent only slowed the bloodshed in refineries, analysts have said.
Shortages of gasoline hit Shanghai and other provinces last month.
The China Petroleum and Chemical Industry Association has warned that China's fuel price controls could again lead to shortages while crude oil prices remain high. The association doesn't expect these to drop in the next three to five years.