State-owned Sinopec Group is counting on its refining business to push profits in 2009 but warned of increasing competition in the fuel market.

"Refining will be the company's main profit force next year," a company newsletter quoted General Manager Su Shulin as saying yesterday.

China will launch a new mechanism that better aligns fuel prices with resource and production costs in 2009.

Chinese refiners, led by Sinopec, suffered massive losses over the past few years due to a state cap on fuel prices while crude costs surged. Although the sector began to enjoy some of the world's fattest profit margins in recent months after crude dived, it is expected to post an overall loss for 2008. China cut fuel prices last week to reflect lower crude costs.

Su predicted the domestic refined oil market would turn to a buyer's market in 2009 from a seller's market in recent years amid slowing demand.

Indeed, some private-sector refiners, mainly in Shandong Province, started to further slash fuel prices recently, hoping to compete for more customers with lower prices.

As the new pricing mechanism introduces a ceiling price, distributors have more freedom to offer discounts when crude costs are low. Under the old system, the government set a guidance price, and refiners were allowed only to charge 8 percent more or less than that.

The new system could intensify competition, a Founder Securities report said. "Such price promotion in the refined oil market would be more frequent in the future," it said.

Su said Sinopec aims to keep its market shares in domestic crude processing and fuel sales and to raise its share in jet kerosene.

But the collapse in crude, which is now almost 80 percent below July's peak, along with the plunging prices for petrochemicals amid the economic slowdown, could hurt Sinopec's other businesses such as crude production and petrochemical sales.

(Shanghai Daily December 26, 2008)