CHINA DATA: Independent refiners cut Oct fuel oil imports before impending tax changes

China’s independent refineries, mostly in eastern Shandong province, cut their fuel oil feedstock procurement in October as the new tax deduction regulations will be effective soon, refinery and trade sources told S&P Global Commodity Insights Oct. 14.

“Some refiners are still buying fuel oil as they don't have crude import quotas, there is no other choice for them,” said an independent refinery source, adding that the volume is set to fall from September.

In September, refiners imported about 1 million metric tons of fuel oil, up 21% from a month earlier to a four-month high, according to Commodity Insights data.

The last high was recorded at 2.03 MMt in April prior to which, fuel oil imports were lower earlier this year.

Beijing is expected to alter the consumption tax regulation on fuel oil and bitumen blend such that independent refineries would need to bear a higher tax burden, significantly impacting their refining and profit margins, Commodity Insights reported earlier.

According to a document circulated in the market since mid-September, the consumption tax levied on fuel oil will only be offset based on the amount equivalent to the actual yield of gasoil and gasoline, which is typically about 60%, sources said. The resulting tax will be much higher than a ratio of almost 100%, according to the previous practice, which will raise the cost of processing those feedstocks and eat into refiners’ profit margins, they added.

“The cost will increase by at least Yuan 400/mt, which will be a big burden for those using the feedstock,” the source added.

Russian M100 cargoes were heard done at a premium of $70-$75/mt against the Mean of Platts Singapore assessment of 380 CST HSFO at the end of September, which was largely stable from previous trades.

In the first three quarters, China’s independent refineries imported a combined 10.38 MMt of fuel oil, up 8.4% from a year earlier.

This accounts for about 7.3% of the total imported feedstock portfolio, comprising fuel oil, bitumen blend and crudes.

China’s independent refiners, as opposed to their state-owned counterparts, are allotted annual quotas for crude imports and are also avid users of fuel oil and bitumen blend as feedstock to produce refined products including gasoil and gasoline.

Implementation not fixed yet

“We’ve only got oral notice but there is no official document specifying the implementation date yet,” said another independent refinery source.

However, some refinery sources expect the implementation to be postponed, given weak refining margins, which will force refiners to cut throughputs and shut units.

The refining margins for cracking imported crudes -- the main feedstock for average refiners -- were still in the negative territory of Yuan 162/mt as of Oct. 9, compared with a loss of Yuan 53/mt a week earlier, data from local information provider JLC showed.

Some other refiners, meanwhile, said they would wait until mid-October to see if the tax system has changed when it comes time to report taxes to local tax offices.

Since it's still unclear when the tax rules will become effective, some independent refineries, especially those without crude import quotas, were importing fuel oil as a feedstock.

“We don’t see any actual effect as long as the implementation is not fixed, so haven’t suspended importing fuel oil,” said a third refinery source.

So it’s very likely that the imports of fuel oil will not diminish soon, as long as refiners still need the feedstock, they said.

In addition, if crude import volumes remain the same as they have in the past three quarters, China’s independent refiners will likely face a crude import quota shortage of at least 5.5 MMt, sources added. This raises the possibility of them continuing to import fuel oil.

Top feedstock imports for China's independent refiners:

('000 mt)