China's New Fuel Pricing Mechanism Bolsters Sinopec Earnings by 24%

Chinese oil giant Sinopec has reported a 24% increase in first-half profit as the company benefited from the country's new pricing mechanism allowing pricing of fuel products in line with the international market.

Asia's biggest oil refiner reported a net profit of 30.3bn yuan ($4.9bn; £3.2bn; €3.7bn) for the January to June period, up 24% from last year. Operating income rose by 17% to 46.7bn yuan.

Total turnover increased by 5% to 1.4tn yuan on the back of higher sales volumes. Crude oil sales rose 18% to 3.38 million tonnes, while natural gas sales were up 11% to 7.65 billion cubic metres. Gasoline sales rose by 14% to 29.2 million tonnes, diesel sales by 2% to 48.7 million tonnes and basic chemical feedstock by 10% to 12.3 million tonnes.

Sinopec's refining business segment reported an operating profit of 213m yuan, bouncing back from an operating loss 18.5bn yuan last year.

The company also hiked its interim dividend by 21%.

New Pricing Mechanism

The Chinese government was controlling the prices of fuel products in order to curb inflation. State-owned oil companies such as Sinopec and PetroChina were unable to hike prices in line with international trends and they suffered losses for many years due to rising costs of refining.

Recently, China implemented a more flexible pricing mechanism allowing higher prices for fuel products in a bid to tackle rising consumption amid shrinking supply. China is the second-largest oil user in the world after the US and its consumption is set to double by 2030.

As per the new policy proposed by the top economic planner in China, the National Development and Reform Commission (NDRC), the window for retail fuel price adjustments was shortened to 10 days from 22 days in the domestic fuel market. This has helped companies to set prices closer to international rates.

Following this, PetroChina profits increased by 5.6% year over year in the first half of 2013, while Cnooc's reported a 7.9% rise in earnings during the same period.

Better Prospects

Sinopec said it expects further growth in earnings in the coming months due to the policy easing.

"The Chinese government will accelerate structural adjustments and upgrades to maintain stable economic growth, chairman Fu Chengyu said in a statement.

"In the second half of the year, we expect balanced supply and demand fundamentals in the global oil market and a steady growth in domestic demand for refined oil products and chemicals."