China's central government is examining several proposals on reforming the country's existing pricing mechanism for gasoline and gasoil sold in the domestic market, with recent slump in international crude prices perceived by many in the industry as a catalyst to such move.

     A source with China's top economic policy planner National Development and Reform Commission said Thursday that the government was studying several proposals on reforming the current oil products pricing mechanism, with each having a different targeted timeline for implementation.

     "The exact timing of implementation (of any new pricing mechanism) is not confirmed as domestic and international economic situations have been volatile," the NDRC source noted.

     Moreover, any new pricing mechanism implementation will require the
involvement of not just NDRC, but also other ministries and government
departments, the NDRC source said, adding that "it takes time to reach an
agreement" among the authorities involved.

     Meanwhile, the Chinese government's mouthpiece China Daily reported
Wednesday that Beijing was ready to roll out its oil pricing mechanism reform
in 20 days, citing anonymous sources close to the government's top
decision-making circles.

     China's existing oil products pricing mechanism, which came into effect
in April 2006, takes into account crude procurement costs, operational costs
of domestic refineries, insurance and freight costs, in additional to the
margins of the refiners. NDRC is responsible for setting guidance retail
prices of gasoil and gasoline based on the mechanism.

     But there is not much transparency on the types of crudes the government
adopts in pricing calculations, the margin levels of refiners as well as
operating costs, and the degree of price fluctuation in the international
market that would trigger a price adjustment in the Chinese market.
 
     Moreover, Beijing is almost always slow to respond to price volatility in
the international oil markets when setting the country's domestic products
prices, thereby leaving the market either soaked with a supply overhang at
times or starved in pronounced supply crunches.

     For instance, China in mid-June implemented a bold and unexpected 16-18%
hike in prices of gasoil and gasoline for the domestic market. Following the
price hikes, gasoline and diesel prices both rose by Yuan 1,000/mt
($146.6/mt). Since then, the government has not revised down domestic products
prices even though NYMEX crude benchmark has plunged by about 63% in the past
four months to settle at $53.62/barrel in New York Wednesday as severe global
downturn puts downward pressure on energy consumption. 
--Staff, newsdesk@platts.com

(platts.com, Nov 20, 2008)