China’s energy sector is still in trouble, but lower global energy prices are providing it with an opportunity to fix those problems.
As global oil prices rose in 2008, China tried to ease the burden on squeezed refiners – caught between high crude oil prices and low retail prices – by raising the cost of fuel for consumers. It was an unpopular move, but it was the right one, according to Farzam Kamalabadi, founder of Future Trends International, a Shanghai-based energy consultancy.
"China has been giving too many subsidies," he said.
Now oil prices are lower, the government can reduce subsidies without driving up end-user prices. Even with the addition of a US$0.14 per liter tax on fuel, at current crude prices, consumers can expect to pay less at the pump.
The reform gives refiners like China Petroleum and Chemical Corporation and China National Petroleum Corp reason to hope for better in the new year. With output cuts due to weak demand and government-mandated stockpiling of oil at high prices ahead of the Olympics, 2008 was one to forget.
Fuel may not be the only sector to see end-user price reductions in the near future. A series of electricity tariff cuts – in Yunnan and Inner Mongolia – could herald cuts in other provinces, said Pierre Lau, head of regional utilities at Citi, in a recent note.
Fortunately for China’s power producers, falling coal prices will offset any potential from lower end-user tariffs. Most big operators are also looking to buy coal mines and secure coal supplies, said Bill Ruccius, a former regional president for US power firm AES. This would remove the constraints of poor supply chains.
Companies to watch: For oil and gas, Sinopec (0386.HK) and PetroChina (0857.HK), the listed units of the big state refiners. For power generation, Huaneng Power (0902.HK) and Datang (0991.HK).