SEEKING VALUE IN CHINA'S OIL DOWNSTREAM

On January 1, 2007, China opened its oil products wholesale sector to greater foreign participation as part of its World Trade Organization commitments. But on initial inspection the Chinese products wholesale sector looks unappetizing for new entrants in the short run. Despite the increase in crude oil prices in the international markets, the Chinese government has been reluctant to raise domestic prices in tandem. The result for Chinese state refiners, which constitute the majority of the sector, is negative refining margins. In this Decision Brief CERA explores where the value lies in China's downstream oil value chain and the signposts for future shifts.

* Ex-refinery prices for gasoline and diesel from state refiners are kept below cost, but instead state refiners benefit from fixed marketing margins.
* Independent players-retailers and wholesalers-suffer from weak margins due to their reliance on state companies for supply.
* Local refiners that have bypassed state-allocated crude supplies have shortened their value chains, and profited.
* The government's new oil products pricing policy, the regulation of crude and product imports, and state companies' level of dominance over crude and product supply will determine the direction of China's product markets and the opportunities for new players.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.