OilVoice - China's Sinopec to Begin Subsidising Exports

China's Sinopec to Begin Subsidising Exports

Thursday, March 04, 2010

Sinopec (China Petroleum & Chemical Corporation) is set to begin subsidising refined product exports before the end of this month in an effort to increase export volumes. This will be the first time that Sinopec - China's biggest refiner - has used subsidies to encourage refined product exports. The decision, which is likely to remain in place until domestic demand and supply were again in balance, is reflective of the need to tackle large inventory overhangs caused by sluggish products demand in the Chinese market.

Reports claim that the subsidy would be equivalent to $19 per tonne, although at present it is unknown whether the subsidy would be applied evenly to all products. However, the subsidy is thought to be budgeted to be paid by Sinopec's marketing subsidiary China International United Petroleum & Chemicals. Sinopec already subsidises refined product sales domestically but this appears to be the first time that it has extended those subsidies to exports.

Sinopec is majority (55%) owned by the wholly state-owned Sinopec Group. The company is the largest retail marketer of oil products in China with 30,063 outlets, equal to a two-thirds share of the domestic fuels market. At the end of 2008, Sinopec could boast a total refining capacity of 3.74 million barrels per day (bpd).

China is currently a net importer of refined products and, with refining capacity continuing to lag behind oil consumption, it is likely to maintain this unwanted status for the foreseeable future. As a direct consequence, oil product exports play a relatively small role in total refining sales.

With China's domestic oil product sales falling further south in the month of January however (by 6%), the Asian nation has been faced with increased overhangs of petroleum, diesel, jet and fuel oil. The decision to widen subsidies to product exports therefore appears to be a temporary interventionist measure designed to reduce stockpiles.

The danger is that the actions of Sinopec may set a broader precedent as a way of reducing stockpiles, with potential risks for the company's refining competitors in South East Asia. Whatever the outcome, Chinese refined product exports look certain to play an increasingly dominant role going forward in the Asia-Pacific products market.