A China Petroleum & Chemical Corp (Sinopec) gas station in Beijing. China's fuel inventories fell last month as consumption rose to a record on demand for travel, manufacturing and spring planting. [Photo / Bloomberg]

Company to run refineries at full capacity to ensure domestic supply

BEIJING / SHANGHAI - China Petrochemical Corp (Sinopec Group), Asia's biggest oil refiner, halted fuel exports to ensure domestic supply as high crude costs and retail price caps cause private refiners to cut back on production.

Sinopec Group said on Tuesday that it "stopped exporting to other regions apart from sustaining the basic resource needs of Hong Kong and Macao". The Beijing-based company will run its refineries at full capacity and cut petrochemical production to boost output of gasoline and diesel for domestic use.

China's fuel inventories fell last month as consumption rose to a record on demand for travel, manufacturing and spring planting. Retail fuel prices increased an average of 10 percent this year, according to Bloomberg, while global crude oil climbed 17 percent.

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"The private refineries aren't making money because of controlled fuel prices and high crude costs, so they have to reduce production," Qiu Xiaofeng, an analyst at Beijing-based Galaxy Securities Co, said. "The State-owned refiners have to step in to fill the output loss." Private refineries produce more than 10 percent of the country's fuel, he said.

China exported 403,442 tons of gasoline and 163,380 tons of diesel in February, according to customs data.

Sinopec Group said that it plans to increase fuel production by 4 percent in April to 10.54 million tons. Output rose 6.2 percent to 31.55 million tons in the first quarter, it said. Crude processing volume climbed 7.4 percent to 54.72 million tons during the period.

The parent of Hong Kong-listed China Petroleum & Chemical Corp (Sinopec) said that it will reduce petrochemical output and use alternative raw materials including liquefied petroleum gas to divert more naphtha to the production of gasoline.

"The wholesale market actually isn't that tight now, suggesting that they could be doing this as advance preparation for peak demand during the summer," Jay Chi, chief analyst at Guangzhou Twinace Petroleum & Chemical Corp, said.

China has "a shortage of resources and growing pressure on fuel supply", Sinopec Group said, without elaborating. The nation has had shortages in the past year, including a diesel shortfall in the fourth quarter when electricity constraints caused factories to generate their own power.

China controls retail fuel tariffs to curb consumer price inflation, which was 5.4 percent last month, the highest since 2008. Refineries still make a loss of $2 a barrel after fuel-price increases on April 7 and Feb 20, according to JPMorgan Chase & Co.

Based on a mechanism introduced in December 2008, the government can adjust retail fuel prices when crude costs change more than 4 percent over 22 working days.

"Shortages were worse when the government didn't adjust fuel prices based on the new mechanism," Deng Yusong, a director at the market economy research department of the State Council Research Center, said at a conference in Shanghai on Tuesday. "If the fuel pricing mechanism isn't strictly implemented, then we can't exclude the possibility of shortages again."

Crude rose above $111 in New York for the first time in 30 months on April 8 as fighting in Libya and unrest in the Middle East spurred supply concerns. Crude was at $106.32 a barrel in electronic trading at 4:08 pm Singapore time.

Bloomberg News