The Annual Equipment of Pipeline and Oil &Gas Storage and Transportation Event
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- Chinese
Longwei Petroleum Investment Holding Ltd. (NYSE Amex: LPH) announced that it expects to benefit from the gasoline and diesel price increase enacted by China's National Development and Reform Commission ("NDRC") on March 20, 2012. The retail prices for fuel were raised for the second time this year, increasing 6.5% for gasoline and 7% for diesel, amid rising world crude prices and falling domestic inflation.
The increase of RMB 600 (approximately USD $95) per metric ton, the second increase in the past two months, is based on a pricing mechanism that allows the NDRC to adjust fuel prices when the cost of crude oil changes by more than 4 percent over a period of 22 working days. After the price increase, average diesel and 90-octane gasoline prices in the PRC will be approximately $4.62 and $4.43 per gallon, respectively. This compares to average fuel prices in the United States for diesel and mid-grade gasoline of $4.15 and $4.00 per gallon, respectively, according to the American Automobile Association ("AAA").
The PRC, the world's second-largest oil consumer, reported an overseas oil dependence ratio of 56% in 2011, according to the China Daily. "With rampant consumption in the spring ploughing season about to come and [the] volatile situation in the Middle East persisting, adjusting fuel prices in a timely manner was an important way to ensure domestic market supply and national energy security," the NDRC stated in a news release regarding the price increase.
"We have been using our working capital primarily to increase inventory and product availability based on anticipated price increases," stated Cai Yongjun, Chairman and CEO of Longwei. "We have been balancing our working capital to take advantage of pricing opportunities to improve margins, as well as balancing the funding required to complete our acquisition of the Huajie Petroleum assets."
At December 31, 2011 the Company had increased its combined balance of inventory on-hand and advances to suppliers by USD $24.2 million or 22.2% to $133.5 million since its fiscal year-end on June 30, 2011. Based on its inventory on-hand product mix of 58,738 metric tons (approximately 19.4 million gallons) of petroleum, the Company's retail inventory value at December 31, 2011 would have increased by approximately USD $5.6 million considering the recent price increase. Longwei also had USD $74.6 million in advances to suppliers at December 31, 2011, which allows the Company to lock in supply and pricing with refineries so that it can react quickly for purchases based on the timing of international crude oil price fluctuations and the PRC retail pricing adjustments.
"We will continue to operate within our business model, which we believe gives us a competitive advantage. By utilizing our large storage capacity and advances to suppliers, we are able to adjust inventory levels based on the anticipated movement of industry pricing, which acts as a hedge on pricing levels," stated Michael Toups, CFO of Longwei. "Utilizing our excess storage capacity allows us flexibility to take advantage of pricing, supply and demand fluctuations within the marketplace."
"The NDRC's decision will enable us to raise prices of our petroleum products, which we anticipate will have a positive effect on our revenues and profits going forward," stated Mr. Cai. "We also expect to experience a slight gross margin improvement, as our inventory on-hand is recorded on a weighted average basis and will be sold at higher market prices."
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