With a significant pace of expansion in processing capacity, Asia’s largest refiner, China Petroleum and Chemical Corporation or Sinopec (SNP) believes that the macro environment will be challenging in the next year. With increasing crude oil prices, fuel demand growth lags behind growing processing capacity.

Once the new refining facilities come on-stream and independent plants increase output, the domestic refined products market will be oversupplied.

China processed a record volume of crude in the last month. Refiners are expanding refining capacity to meet industrial demand encouraged by the government’s economic stimulus and to benefit from a fuel-pricing system introduced last year that ensures a profit.

Under the new system, the government may adjust fuel prices when crude oil costs change more than 4% over 22 consecutive working days. China last raised gasoline and diesel prices by as much as 8% on Nov 10, the country’s fifth increase this year.

The government caps the prices of refined-products to control inflation. While growing product sales should offset some of the weakness in refining margins, overall downstream earnings are expected to remain under pressure. In addition, rising costs also remain a concern. Operating expenses of refiners have been steadily going up over the last few years, a trend that is expected to remain in place, going forward.

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