Friday, June 20, 2008

China shocks with 18 percent fuel price rise

By Chen Aizhu and Carolyn Qu

BEIJING (Reuters) - China unexpectedly raised retail gasoline and diesel prices by up to 18 percent on Thursday, sending oil prices tumbling as Beijing moved to temper demand at the risk of stoking domestic angst over decade-high inflation.

The increase in regulated fuel prices, China's first hike in eight months and its sharpest ever one-off rise, sent crude prices down by as much as $5 a barrel as dealers bet it might slow demand growth from the world's second-largest oil user, while U.S.-listed shares in top refiner Sinopec soared.

After making little progress in recent years toward its long-stated goal of raising energy prices to reflect higher costs and to encourage greater efficiency, China will also increase power tariffs by nearly 5 percent, while freezing thermal coal prices to revive generators' profits.

While neighbours from India to Indonesia have already bowed to the pressures of near $140 oil by scaling back subsidies and raising fuel prices, most analysts had expected Beijing to hold out until after the Olympics in August as policymakers focused on battling inflation and avoiding any hint of social unrest.

However, it comes at a time of mounting international pressure for some kind of action to tame soaring global prices, which have spurred protests worldwide and threaten to cut economic growth.

On Sunday the world's biggest oil producers and consumers will convene a crisis meeting in Jeddah, Saudi Arabia, to try to halt oil's six-year rally -- blamed by some, including the U.S. Energy Secretary just weeks ago, on subsidies in countries like China that shield consumers from soaring costs.

"This is very significant, a watershed move which suggests the Chinese government is prepared to risk unpopularity to curb the growth in domestic fuel demand," said John Kemp, commodities economist at RBS Sempra in London."

"We've already seen other Asian economies cut subsidies and the one big hold out, until now, was China."

Fearful of stirring popular resentment, Beijing also pledged subsidies to lower-income groups such as farmers, fishermen and cab drivers, similar to the targeted payouts that countries like Malaysia are now adopting as they reduce fuel subsidies that distort markets and benefit the rich more than the poor.

In Beijing and Shanghai, motorists queued for gasoline at petrol stations on Thursday night as word of the price hike leaked out. Police stood by at one Beijing petrol station.


Prices for gasoline and diesel fuel will rise by 1,000 yuan per tonne each effective from midnight, state media reported on Thursday evening.

The 16.7 percent increase in gasoline takes the pump rate to about 75 U.S. cents a litre, still a quarter cheaper than in the United States and about one-third what UK motorists pay. Prices have doubled since 2003, but crude has more than quadrupled.

China also raised jet fuel prices by 1,500 yuan per tonne.

Beijing will raise average electricity tariffs by 0.025 yuan/kwh or about 4.7 percent on average, a rise that will primarily affect industrial and commercial users, the NDRC, China's top planning body, said on its website.

The rise, effective from July 1, is its first broad increase in years and will help avert brownouts by bolstering power companies struggling with the soaring cost of coal, which generates some three quarters of China's electricity. Beijing also said it will freeze thermal coal prices, which are normally allowed to trade freely, a move traders said could prompt more exports into an Asian market now at record highs.

China's central bank governor, Zhou Xiaochuan, told reporters in Washington after two days of U.S.-China trade talks that, on fuel prices, "the direction of reform and the determination had always been there and the rest is timing."

Asked whether he feared new inflationary pressures from the oil price hike, he said only that more monitoring was needed, while analysts saw an extra percentage point added to inflation.

"When oil prices are high, consumers have to cut expenditures on other items, so demand for other products will be lower," said Gene Ma, chief economist for China Economic Monitor, a Beijing consultancy.


Refiners Sinopec and No. 2 PetroChina, which is less reliant on costly imported crude, will get an immediate boost from the price increase as they bear most of the burden of buying expensive crude and selling their refined gasoline and diesel products at below-cost domestic rates.

Oil prices fell as much as $3 a barrel immediately after the news on worries that demand would be cut. China has raised prices only once since mid-2006, a 10 percent increase in November.

China's rapid demand growth was one of the catalysts for oil's surge from $20 six years ago to a record high of nearly $140 a barrel earlier this week.

(Additional reporting by Simon Rabinovitch; editing by Jim Marshall)

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