The Free Ride in China Is Over

In our recent Foolish oil outlook, we noted the detrimental impact that fuel subsidies are having on worldwide demand. Many countries have readjusted their rates to more closely reflect global prices. At first it looked like China would be a holdout, but even this prince of price-fixers is feeling the pressure.

China's announcement that it's immediately raising gasoline and diesel prices -- by 17% and 18%, respectively -- is a significant move, and the winners and losers are starkly clear.

The most obvious beneficiaries are the oil refiners, China Petroleum & Chemical (NYSE: SNP  ) -- also known as Sinopec -- and PetroChina (NYSE: PTR  ) . Without the ability to set prices for their retail products, these companies see their refining profits pickled when crude oil prices pop. The government actually paid Sinopec to compensate the company for its operating losses, so slashing the fuel subsidy actually saves the government money on multiple fronts.

Another big beneficiary of today's fuel-price adjustment is Gushan Environmental Energy (NYSE: GU  ) . This company cooks up batches of biodiesel from waste vegetable oil. As noted in my first look at the company, margins have steadily contracted, but they're still incredible compared to the suckers using pricey petroleum feedstock. Today's price increase is pure gravy for Gushan.

Along with the diesel and gasoline increases, the Chinese government also decided to kick electricity rates up a notch as well. I think that's why you're seeing shares of utilities like Huaneng Power (NYSE: HNP  ) powering higher today as well. On the margin, a higher electricity price also has to be good for solar makers such as Yingli Green Energy (NYSE: YGE  ) , since their modules have an easier time competing at a higher price point.

The electricity price increase spares residential customers, not to mention agricultural players such as AgFeed Industries (Nasdaq: FEED  ) , so that leaves big industrial players like Aluminum Corporation of China (NYSE: ACH  ) to bear the higher costs. Chalco may not be cheering, but these price increases will help keep China from coming untethered from real-world commodity costs.

Want to see our Motley Fool CAPS players' highest-rated China stocks? Look no further.

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Huaneng Power is both a Rule Breakers and an Income Investor recommendation. We'll happily subsidize your 30-day free trial of any of our Foolish newsletters.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 19, 2008, at 11:03 PM, chinajeff wrote:

    Your comment about the oil hike helping YINGLI solar is not relevant. YINGLI has pretty much 100% of its sales outside of China as the Chinese government has no incentives in place for solar energy such as feed in tariffs, tax credits, or power purchase agreements. Solar is almost non-existent in China except for 'solar' hot water heaters which are basically solar thermal, not PV. If the US would get off its tail and pass a broad alternative energy bill, than that would be a catalyst for a company like YINGLI, or even more so for a company such as SOPW which is a manufacturer and installer fo solar systems in the US.

  • Report this Comment On June 20, 2008, at 11:15 AM, XMFSmashy wrote:

    Some fair points, Jeff, but I still hold that on the margin, higher electricity prices put Yingli closer to being able to sell into their domestic market, instead of Europe or South Korea or the US. You're right to point out that government incentives would still have to play a role beyond that.

    I definitely didn't mean to imply that Chinese solar stocks would rise on this news, and hope no one read it that way.

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