COMMODITIES 2025: China's export tax rebate cut may tighten Asian middle distillate supply, support cracks

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Asian clean oil product traders widely anticipate that Chinese refiners will curtail exports in the coming quarters due to reduced export tax incentives, potentially tightening the regional supply-demand balance and improving crack spreads in 2025.

Asian clean oil product cracks have mostly tumbled 40% or more since the second half of 2023, as demand fundamentals weakened amid sluggish industrial activity and fragile consumer sentiment across Asia, while South Korean and Chinese supplies were abundant in the regional market.

Beijing's recent decision to reduce tax rebates on exporting gasoline, gasoil and jet fuel to 9% from 13% is expected to bolster crack spreads next year by limiting Chinese supply flows into the market, helping to rebalance regional supply-demand dynamics, according to Singapore-based traders and oil product marketers at Japanese, Thai, South Korean and Malaysian refiners.

Platts, part of S&P Global Commodity Insights, assessed the second-month Singapore gasoil swap crack against Dubai crude swaps at an average of $14.78/b so far in the fourth quarter, compared with the Q4 2023 average of $23.26/b.

"The 4-percentage-point reduction in tax rebate would seriously hurt their [Chinese refiners'] margins and discourage them from selling [their products] overseas ... Supply in Asia should tighten overall," a middle distillate product sales and marketing manager at a major South Korean refiner said.

"The tax rebate cut will definitely reduce China's incentive to export jet fuel, but it eventually boils down to cracks and domestic margins," a regional middle distillate trader said.

China's clean product exports are forecast at 711,000 b/d in 2025, down 13% from the 2024 projection of 816,000 b/d, due to reduced tax rebates, Commodity Insights analysts said in a monthly report dated Nov. 29. Analysts estimate year-over-year reductions of about 55,000 b/d in gasoline exports, 15,000 b/d in gasoil and 31,000 b/d in jet fuel in 2025.

A more conservative estimate of around a 10% decline in Chinese exports next year would still significantly tighten overall clean product supplies in the Asian market and support crack spreads, according to product marketers and traders in Singapore, South Korea and Australia.

China's clean oil product exports in the first 10 months of the year fell 11% year over year to 31.45 million mt, or around 816,340 b/d, the latest data from the General Administration of Customs showed.

China's export mechanism

While the general Asian market consensus points to a 10%-13% decline in Chinese supplies next year, analysts and traders noted that a more accurate assessment of Chinese gasoline, gasoil and jet fuel shipment outlook will depend on Beijing's official announcement regarding 2025 clean product export quotas.

Market sources and analysts generally expect the 2025 quotas to remain steady from recent years at about 41 million mt, but the volume of export quotas allocated to the processing trade route, also known as the tolling trade route, will be crucial to Chinese oil companies' export margins.

China typically allows oil product exports via two routes -- the processing trade route and the general trade route -- and issues separate quotas for each.

In 2024, Beijing allocated 7.93 million mt in export quotas under the processing trade route and 33.07 million mt under the general trade route.

The tax rebate cut primarily affects exports under the general trade route, which typically involve cargoes shipped overseas, while clean products exported under the processing trade route will remain tax-free and exempt from the new policy, according to a Beijing-based tax specialist.

"It will be more difficult to find cargoes from China [next year] as refineries prioritize tolling," a jet fuel market source with close knowledge of Chinese and regional spot trades said.

The impact on China's export volumes will largely hinge on the upcoming quota allocations. Without an increase in tolling quotas, refiners may be disincentivized to export, the market source added.

Export market share

Any reduction in Chinese exports would present opportunities for other Asian refiners and trading companies to increase their market share in various outlets in Oceania and Southeast Asia, according to market participants and refinery sources.

Australia, for one, is a lucrative market for key oil product exports, and more shipments could be made to replace Chinese supplies in the Oceania outlet, according to sales and marketing executives at two South Korean refiners.

South Korea -- Asia's largest net exporter and supplier of clean oil products -- sold 346.05 million barrels of gasoline, gasoil and jet fuel combined in the first 10 months of 2024, up 7.8% year over year, the latest data from state-run Korea National Oil Corp. showed.

"We see that the Chinese tax rebate cut will lower export margins by about $3-$4/b from December, so China's export volume will decrease," a Northeast Asian middle distillate market participant with close knowledge of South Korean and Chinese trade flows said.

As a result, South Korean refineries will have better opportunities to produce and export higher volumes, driven by improved margins, the market participant added.

South Korea sold 77.32 million barrels of oil products to Australia and 21.54 million barrels to New Zealand over January-October, accounting for nearly a quarter of its total oil product exports of 430 million barrels in the first 10 months, KNOC data showed.

Among recent spot tender sales, SK Energy sold 900,000 barrels of 10 parts per million sulfur gasoil for loading over Dec. 18-Jan. 2, according to trade sources.

A marketing manager at a state-run Thai refiner said that a potential reduction in Chinese exports could help the company further strengthen its gasoil/diesel export market share in various Southeast Asian outlets, including Laos and Cambodia.