Tough love

In a vast and gritty Shanghai truck yard, Chen Gan, 39, toils in stifling heat, performing routine maintenance on his truck. The atmosphere is grim.

The day before, on June 20, the National Development and Reform Commission (NDRC) raised domestic gasoline and diesel prices by 17% and 18% respectively. It was the first time prices had been allowed to rise since November, despite the soaring value of crude oil. The NDRC, which sets energy policy and prices, also capped the price of coal and raised the average retail power tariff for electricity 4.7%.

“Of course it’s going to affect my business, but what can we do about it?” asked Chen. “The government decides everything.”

Fixing the system
People like Chen are not the only ones complaining about the hikes. The companies that refine oil and generate power are also unhappy, but for a different reason: in their view, the increases are too small.

The struggle between the needs of truckers and refiners is one of many that Beijing must arbitrate as it tries to fix a hobbled energy pricing system. While it seems to be heading in the right direction, a monumental task lies ahead.

The clearest winners from the fuel hike are oil refiners, who need help badly. For the first quarter of the year, state-owned Sinopec posted a loss of US$2.92 billion in its refinery business, while profits at China National Petroleum Corp (CNPC), also a state-owned enterprise (SOE), dropped 36% due to poor refinery performance.

Refineries, forced to buy crude oil at rising international prices, can’t profit by selling gasoline and diesel domestically at prices capped by the government.

“Due to [Beijing’s] priority to control inflation, obviously there must be some people, some areas, some companies who need to sacrifice,” said Alex Fan, an energy analyst at the Daiwa Institute of Research. “This time around it’s refiners.”

Privately held refiners – which account for 35% of China’s total refining capacity – are even more exposed to price volatility but can’t claim the state subsidies paid to the likes of Sinopec and CNPC.

Zhang Chengru, chairman of the Shandong Private Oil and Gas Association, which represents private refiners in the eastern province, said the fuel price hikes needed to be higher because they were still below international rates.

Limited impact
Independent power producers (IPPs) face a similar situation with the power tariff hikes. Unlike the fuel price rise, which directly raises the cost of a refiner’s end product, IPPs share in a fraction of the increased retail tariff.

“I must say it has had a very, very limited effect,” said a foreign IPP with operations in China, who asked to remain anonymous. “The actual tariff that’s been passed on to our plants, I’d say it’s around 1.5 fen (US$0.2) per kilowatt-hour.”

That’s a pittance for IPPs because the NDRC’s coal price cap is proving ineffective. It applies to coal prices at the mine but can’t control transportation or distribution costs. The IPP said smaller players are being forced to close, and that only a bigger tariff hike will help.

Farzam Kamalabadi, founder of Future Trends International, a consultancy in Shanghai, said Beijing’s problems are due to its reluctance to match international prices when they fell in late 2005.

Back in the Shanghai truck yard, Chen and the other truckers may not be able to shoulder the rising costs much longer.

“The fuel for a round trip from Shanghai through Chengdu and Chongqing will cost me around RMB6,000 (US$882),” Chen said of the 4,800-kilometer journey. “That’s RMB1,500 (US$221) a month more than before.”