China is inching closer to imposing a consumption tax on mixed aromatics, light cycle oil and bitumen blend, a move that will likely curb inflows of those products and stem surging oil product exports by Asia's biggest oil consumer. The planned policy change will also likely increase China's imports of lighter crudes for gasoline production to offset the squeeze in the blending pool if consumption taxes are imposed. Beijing is widely expected to levy consumption taxes on mixed aromatics and light cycle oil. Although there has been no official confirmation, market participants expect details to be released some time between May 1 and July 1. S&P Global Platts reports on the situation in its article Analysis: China seen moving swiftly to rein in oil blending frenzy
Sources with knowledge of the matter said the consumption taxes for mixed aromatics, LCO and bitumen blend would use the current consumption taxes on gasoline, gasoil and fuel oil as a reference; these currently stand at Yuan 1.52/liter, Yuan 1.20/liter and Yuan 1.20/liter respectively. "This means importers will have to pay Yuan 1,000-2,000/mt more for importing those products, which is expected to largely curb inflows of these grades, just like what happened to fuel oil a few years ago," a market source said. China's fuel oil imports have fallen dramatically since Beijing imposed the consumption tax in 2008.
Mixed aromatics is the main blending material for gasoline, and LCO for gasoil. Bitumen blend is a mixture of fuel oil and heavy crude, which can be used as a refining feedstock. "Blending profit will immediately be eliminated due to the consumption tax," said one Guangzhou-based importer.
China's imports of mixed aromatics and LCO have surged in recent years, as both are currently free of consumption tax. China's mixed aromatics imports jumped 81.4% year on year to 11.7 million mt in 2016, while LCO imports soared 135% to 4.46 million mt, General Administration of Customs data showed. The mixed aromatics inflows in 2016 translated roughly into 39 million mt of gasoline supply from the blending pool, in addition to the official output of 129.32 mt from refineries. LCO inflows resulted in an additional 10 million mt of gasoil supply on top of the 179.18 million mt output from refineries.
The impact on bitumen blend import volumes from a consumption tax is expected to be softer as imports of the grade have been sliding since 2015, when independent refineries started using crude oil as feedstock. China imported around 3.69 million mt of bitumen blend in 2016, down 72.5% year on year, according to customs data.
OIL PRODUCT EXPORTS TO SLOW
According to Platts China Oil Analytics, huge imports of blending components into China resulted in "hidden demand" last year as blended fuels were not captured by official production data. "We estimate that gasoil and gasoline demand last year was understated by at least 290,000 b/d and this did not include finished grades produced by independent fuel blenders, which is difficult to quantify," it said in a report issued April 11. The additional supply from the blending pool was responsible for pushing up China's gasoline and gasoil exports by 64% and 114% year on year respectively in 2016 to 9.7 million mt and 15.4 million mt. When the consumption tax takes effect, China's exports of gasoline are expected to drop, as refineries would need to boost supply to the domestic market to make up for the supply cut from oil blenders, sources said.
"Once the import window for mixed aromatics is closed, less gasoline will be available for export out of China," said a Beijing-based analyst. A Singapore-based market observer said gasoil exports would be somewhat sustained as LCO accounted for a relatively smaller portion of the gasoil pool. Mixed aromatics makes up a crucial portion of the gasoline pool. However, China is unlikely to have adequate gasoline or gasoil inflow to compensate for the supply reduction from blenders, because Beijing has suspended issuing import quotas for these products in 2017, except for a small volume with special specifications for car racing. "Despite pushing for deregulation in the refining sector by encouraging more players into the market to compete on a level playing field, the theme is veering toward control and consolidation, with the government now appearing to take an active stand to curb exports," Platts China Oil Analytics said in the report.
TRICKLE-DOWN IMPACT ON FREIGHT
Plans to impose consumption taxes on mixed aromatics and light cycle oil are already taking a toll on freight rates for Medium Range tankers, brokers across East and North Asia said. Large numbers of mixed aromatic cargoes are shipped out of Singapore to China in MR tankers. These tankers then load distillates for delivery to Singapore, the Philippines and South Korea, among other destinations. The proposed consumption tax, refinery turnarounds and lower export quota volumes for oil products from China have started to hurt freight rates for MRs across the region. "The MR market is collapsing," said a broker in Seoul. The lump sum freight on the South Korea-Japan route was assessed last Friday at $290,000, down 27% from $395,000 at the start of the year, Platts data showed. The South Korea-Hong Kong and the Singapore-Hong Kong rates were assessed at $250,000 and $260,000 respectively, down from $325,000 and $320,000 at the start of the year, the data showed.
"Exports [of distillates] from China have been slow from end March," said an MR broker in Singapore. Prompt ships are in oversupply, he added. Meanwhile, domestic refineries in China, especially state-owned refineries, are expected to benefit from the move, as the heavy tax on mixed aromatics and LCO would eliminate competition from oil blenders, sources said. "Once China imposes consumption taxes on mixed aromatics and LCO, the country's gasoline and gasoil needs have to be increasingly met by refineries, especially state-owned refineries," a source with a Singapore trading house said. "Independent refineries are also expected to benefit from less competition from oil blenders," the source added. A source with state-owned Sinopec Guangzhou refinery said: "Our domestic sales of gasoline will increase if the news turns out to be true. We will raise output too."
