Other Stories

Since the introduction of this more transparent pricing model, the NDRC has adjusted prices 25 times, eight of which were in 2012.

06 Apr 2013

Commodity Online
China’s more flexible fuel pricing system would make domestic fuel prices track crude prices more quickly and reduce speculation, but the impact on outright demand is likely limited, according to Barclays report. On 25 March 2013, the National Development and Reform Commission (NDRC) announced several changes to the current fuel pricing model.

The threshold of adjusting prices will be lowered: instead of adjusting fuel prices only after a crude basket of Dubai, Brent and Cinta has moved by more than 4% during a period of 22 working days, China can now changeprices as long as fuel price moves are bigger than 50RMB/t (or 0.5%) over ten working days. The government also tweaked the basket without revealing the new composite.

The fine-tuning of the model, in place since 2009, does not materially change how prices are set currently. Prior to 2009, the pricing decision and benchmarks were opaque and price changes were infrequent. As crude price spiked 40% in H1 2008, gasoline prices were only raised by 5% as inflationary worries rose. The long stretches of price uncertainty and refining losses led refiners to reduce runs and carry smaller inventory, which led to widespread fuel shortages.

Since the introduction of this more transparent pricing model, the NDRC has adjusted prices 25 times, eight of which were in 2012. Crude costs have largely been allowed to be passed on to consumers. Now domestic fuel prices will track crude prices more closely, but the government remains the decision maker in the process. The NDRC would gradually reduce refiner margins when oil prices are above $80/t, and fuel prices may be frozen when crude prices exceed $130/t. In addition, the government can suspend any pricing changes if there are sudden price shocks or inflationary pressures.

While the government remains the key driver of fuel pricing, these new changes will help reduce speculation and allow for a more accurate read of demand. The one-month lag in price adjustments has distorted stocking patterns at distributors. When price hikes are expected, distributors tend to stockpile and hoard products and vice versa, making it more difficult for refineries to plan runs and meet demand.

With the response time now halved, speculative hoarding will likely persist, albeit on a smaller scale. Refiners can now plan trade and production with greater certainty. While aggregate demand is unlikely to be affected, a more responsive pricing model will make it easier to read Chinese demand.

Click on the image to reload it
Click to reload image