Energy & Resources

Pump priming

As China’s car population grows, so too does the battle to fill drivers’ tanks

Pump priming

Had his fill of the competition

There’s a war going on between China’s state-owned oil majors and their smaller private sector rivals. Although giants Sinopec and PetroChina have an effective duopoly of the country’s petrol stations, a hardy band of newcomers is starting to threaten their dominance.

Until recently, the idea of taking market share away from the two entrenched giants seemed impossible. They had their own oil wells, most of the country’s refining capacity and the majority of its petrol stations. The refineries they didn’t own were forced to sell to them anyway. So the independent petrol stations had no choice but to buy from the big boys, and little opportunity to then undercut their prices.

“The two groups formed a monopoly of wholesale refined oil,” Hebei-based petrol station owner Qi Fang told the Economic Observer, “and private enterprises had to rely on them so there was no way to compete.”

If that wasn’t discouraging enough, high oil prices made the business practically suicidal for independents. Crude prices spiked from $54 a barrel in the beginning of 2007, to over $134 in mid-2008. That would have been slightly less of a headache if petrol stations could have passed on the difference to drivers – but that wasn’t how things worked. The National Development and Reform Commission (NDRC) set a cap on the price that could be charged at the pump, and it wasn’t keen on finding out what might happen if petrol prices tripled. So the retail prices remained largely unchanged, even as wholesale price went higher.

“In the past, the international oil price was high and the retail price was subject to state regulation,” laments Liu Qiqiu, manager of a Liaoning petrol station company, “the upside-down relationship of wholesale and retail prices was so severe that the more petrol you sold the more money you lost.”

The result was gas station genocide. The Economic Observer estimates that as many as a third of the country’s 45,000 independent petrol stations went out of business as international oil prices reached their peak. At the same time, the majors got government subsidies and tax breaks to cover some of the financial impact of having to sell at a loss.

But those days look like they are coming to an end. The NDRC changed its pricing-setting mechanism last year so that refiners and retailers can earn profits as long as oil stays below $120 a barrel – the price was around $83 when this story went to print.

What’s more, the independent stations are finding alternative sources of petrol. Competing refineries reportedly more than doubled their capacity last year, which has enabled some stations to buy gasoline below the Sinopec-PetroChina mandated wholesale price.

This has further encouraged new entrants to the industry. Thousands of new stations have appeared roadside in the past year – and a price war is in the offing. “As long as there is even a little profit we are willing to sell!” declared a defiant Liu Qiqiu.

“PetroChina and Sinopec have had several meetings aimed at price stability,” according to the Economic Observer, but falling profits have forced both to cut prices to compete with their independent rivals. So even as the NDRC raised the price of refined oil last November, Sinopec reportedly had to cut the prices it charged at their Beijing pumps.

Round one seems to have gone to the plucky independents, who to the dismay of the big boys, have grabbed market share.

But the fight’s not over yet. Both Sinopec and PetroChina are expanding their network of petrol stations, and could yet regain control by buying out their competitors. And a spike in oil prices or a change in policy could turn the tables once again.

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