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Petrobras fuel price increase doesn’t go far enough

The state owned company announced an increase in fuel prices, however analysts say it isn't enough

After months of wrangling with the government, Brazil’s state-owned oil company Petrobras announced a long-awaited increase in domestic fuel prices. The move will help boost the company’s bottom line, but analysts have warned that it does not go far enough to make the company’s refining business profitable.

Gasoline prices will rise by 6.6%, while diesel prices will go up 5.4%, Petrobras said in a 29 January statement. The Brazilian government determines prices Petrobras charges at the pump at its chain of petrol stations. In December, the average price in Brazil for a litre of gasoline was R$2.75 ($1.38) and R$2.15 per litre of diesel, according to the National Petroleum Agency (ANP). “These price adjustments were calculated by the company taking into account the company's pricing policy, which seeks to align the price of oil products with the international market in the medium and long-term,” Petrobras said in a statement.

Fuel prices have become a flashpoint between management at Petrobras and the government. Brazil does not produce enough gasoline and diesel domestically, so Petrobras is forced to buy it from the international market. Fixed domestic fuel prices, however, prevent the company from passing the full cost onto consumers at the pumps.

As demand for fuel products has soared, Petrobras has been forced to increasingly rely on imports, and losses have mounted. The company imported 123,183 barrels a day (b/d) of gasoline in November, nearly 25% of overall demand, and 306,064 b/d of diesel, 29% of total demand.

In the fourth quarter of 2012, Petrobras saw losses of R$8.6 billion in its refining unit. That beat expectations it could see losses of as much as R$10 billion for the quarter, but was still up 33% over the same period in 2011. Petrobras' refining business lost R$34.1bn in 2012, up from R$14.5bn in 2011.

Petrobras’ private shareholders have complained as the losses have contributed to the company’s disappointing share price performance, and executives have warned that the financial squeeze could hamper its the firm’s ability to execute it ambitious $237bn investment programme. The government, though, has been wary of allowing prices to rise too fast over fears that it could fuel inflation – a persistent concern for policymakers.

Analysts, though, have warned that, although a step in the right direction, the compromise does not go far enough for the company. “Make no mistake: the announcement is positive as anything that enhances Petrobras’ cash flow is welcome. The problem is that the increase does not cover past losses and does not bring Petrobras’ refining results back to black,” Sequeria wrote in a research note.

That view was echoed by analysts at Credit Suisse. “Individual price increases... do not change our view because they do not address the parity mismatch issue – which means that pricing policy remains away from market pricing – and imply the imports will continue to be loss-making, and an earnings- and cash-drag for the company.”

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