China is inching closer to imposing a consumption tax on mixed aromatics, light cycle oil (LCO) and bitumen blend. The plan has shaken up everyone from the oil industry to the shipping industry, says industry analyst Platts.
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.
The planned policy change will likely curb inflows of those products and stem surging oil product exports by Asia's biggest oil consumer. Details are expected to be released sometime between May 1 and July 1, but sources with knowledge of the matter said the consumption taxes would use the current consumption taxes on gasoline, gasoil and fuel oil as a reference.
"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," one market source said. China's fuel oil imports have fallen dramatically since Beijing imposed the consumption tax in 2008.
"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 percent year on year to 11.7 million mt in 2016, while LCO imports soared 135 percent 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 percent year on year, according to customs data.
The plans are already taking a toll on freight rates for Medium Range (MR) tankers, brokers across East and North Asia have 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 percent 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.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.