HONG KONG: PetroChina Co and China Petroleum & Chemical Corp, the biggest oil companies on the mainland, shares slumped on concern the government will keep fuel prices unchanged to support the economy as crude climbs, squeezing refining margins.

Yesterday, PetroChina dropped 2.84 percent, or HK$0.25, to end at HK$8.56, while China Petroleum, also known as Sinopec, finished down 3 percent, or HK$0.2, at HK$6.47. The stocks moved in line with the 1.86 percent fall in the benchmark Hang Seng Index, which closed at 19,724.19.

Some analysts give weight to those concerns: "I see little chance of the government raising gasoline and diesel prices this time," Qiu Xiaofeng, an analyst with Shanghai-based China Merchants Securities Co, said by phone yesterday. "They may wait until after the October National Day celebrations."

Investors are worried that the government is more wary about raising prices as the cost of crude rises and that this will impact Sinopec and also PetroChina, Michael Yuk, an analyst at Sun Hung Kai Financial, said in Hong Kong.

The frequency of price increases is, of course, as important as their size. Beijing will reduce the number of times it adjusts fuel prices "at this critical juncture" as changes will add "uncertainty" to the economy, the Shanghai Securities News reported on August 29.

Crude oil has gained about 35 percent since the government introduced a new mechanism for adjusting fuel prices that promises a "normal" profit for refiners.

Prices of gasoline and diesel have risen by as much as 25 percent under the new pricing system.

Beijing's relaxation of price curbs helped Sinopec end four years of refining losses and prompted PetroChina to boost investment in oil processing.

Second-quarter net income at Sinopec, the nation's biggest fuel producer, reached a record 22 billion yuan ($3.2 billion) and the company said August 23 it expected nine-month earnings to rise more than 50 percent.

PetroChina's operating profit at its refining unit reached an all-time high of 17.2 billion yuan in the first six months, the Beijing-based company said last week after announcing its earnings.

China Daily - Bloomberg News

(HK Edition 09/01/2009 page4)