Sinopec Under Pressure from Private Competitors in Retail Market

Cover, Issue 445, November 23, 2009
Translated by Liu Peng
Original Article: [Chinese]

Sinopec, the country's state-owned oil group, recently cut its processed oil retail price for the first time this year, a move that probably fired the first shot in reshaping the country's process oil retail market, which were previously firmly dominated by the state-owned oil giants.

In mid November, just two days after National Development and Reform Commission, China's top economic planner, announced another increase in fuel prices in line with the country's new pricing system, Sinopec decided to cut the price of petrol and diesel at certain service stations in Beijing.

Such moves were in response to strong competition pressure from private gas stations, which have witnessed a rapid expansion in the wake of the global financial crisis, the Economic Observer (EO) learned.

Over the past year, about 20,000 private gas stations have opened in regions that were dominated by Sinopec.

Sinopec's Counterblow
Li Yan, a wage-earner in Beijing, used to fuel at Duo Meiduo, a local private filling station as she thought the petrol quality there was as good as the Sinopec's.

However, she recently decided to shift to Sinopec's service station for fueling, for the latter lowered No.93 petrol by 0.3 yuan per liter in the middle of November.

After the price cut, the present price for No.93 petrol was even a little lower compared to the level before the NDRC announced another increase in fuel price on November 10.

A source from Beijing Branch of Sinopec Sales Company interpreted such move as the regional point-counter-point sale strategies. However, Sinopec's service stations in Shanghai, Chongqing, Changchun city also followed suit. In addition, PetroChina began to join in the same camp.

In the past, due to always considering PetroChina as its main rival, Sinopec didn't take the initiative to cut the retail price to compete with private filling stations.

However, the situation changed this year.

The EO learned processed oil sales for Sinopec in the first half of this year dropped 8 percent from a year earlier to 57 million tons, but its sales target for 2009 was 130 million tons. As a result, Sinopec faced huge sale pressure.

In addition, Sinopec's market share in the north, east and south of the country has registered a 10 percent drop from 60 percent to 50 percent.

What's more important is that private gas stations witnessed a rapid development in the past year and their retail price was much lower compared with the two state-owned oil group.

Reviving of Private Gas Station
Qi Fang, chairman of Hebei Provincial Chamber of Commerce for Petroleum Industry, said private refinery firms had weathered through the downturn.

The number of private gas stations in Hebei province was close to 4,000, which accounted for over 50 percent of the total gas stations in the province and occupied one third shares in the oil retail market.

Chen Shunsui, chairman of Guangdong Provincial Petroleum Industry Association, introduced that Guangdong had over 2,400 private gas stations, which accounted for 48 percent of retail market shares. Chen said some private gas stations had carried off many clients including large factories from Sinopec.

Private gas stations overwhelmed those run by the two state-owned oil groups in China's northeastern Liaoning province. Of the total over 6,000 gas stations, private ones stood at 85 percent.

Due to the skyrocketing rise in crude oil price and the price control against petrol and diesel oil adopted by the NDRC in view of social acceptability in last year, a large number of private oil refiners and gas stations made a loss, even went broke.

However, thanks to the carry-out of the new oil pricing mechanism and expansion of crude oil sources, many private refiners and gas stations resumed the operation and experienced a rapid expansion.

Liu Qiqiu, a private gas station owner in Liaoning province, said different from the Sinopec's sale strategy, private gas stations mainly depended on small margins in order to earn quick returns. "We can sell it as long as there is a penny margin! Sinopec and PetroChina won't certainly follow suit," Liu added.

In response to the pressure from private gas stations, Sinopec and PetroChina have accelerated paces to acquire their private rivals.

The EO learned from October, Sinopec began to transferred the power of approving acquisition of private gas stations from the headquarters to its provincial-level sales company.

A source from PetroChina also revealed that in order to maintain its market share, PetroChina would acquire private gas stations at all cost.