Shanghai fuel prices surge on talk of profit rise

THE wholesale prices of diesel and gasoline in Shanghai have surged in the past week on speculation that a reform of China's fuel pricing mechanism and tax policy will provide more room for retailers to make profit.

The wholesale price for No. 0 diesel in Shanghai has jumped to up to 6,500 yuan (US$952) a ton. It was as low as 5,200 yuan a ton last week.

Industry insiders suggest the domestic oil and gas price may be first lowered, and then a tax will be levied, which will eventually bring the new "taxed" retail price close to the current price.

A government insider familiar with the industry revealed that the new mechanism will relax control on prices when the crude oil price stays below US$130 per barrel, according to a report by Shanghai Securities News yesterday.

Refiners will be better protected from losses than before when the fuel prices go in line with the crude prices.

Retailers will be allowed to raise fuel prices by up to 4 percent above factory gate prices, which include crude costs, processing costs and a certain amount of profit margin, according to the source.

Fluctuations in the retail prices would be limited to 800 yuan a ton on either side each month under the new scheme and 1,600 yuan a ton within three months.

"The reform will also allow some competition in selling products given the recent hefty slump in oil price," said Qiu Xiaofeng, analyst at China Merchants Securities.

The wholesale prices fell early this month, but have rebounded since the National Development and Reform Commission, the country's top economic planner, said it is accelerating the study of the reform on November 20.

Yao Daming, an official of Guangdong Oil and Gas Association, said: "Retailers and refiners are still waiting for policies to be issued before deciding their next move."