China’s consumption tax presents mixed opportunities for tanker markets


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By Jane Xie, SSY Consultancy and Research

 

China is set to impose consumption taxes on a basket of refined products, including mixed aromatics, light-cycle oil (LCO) and diluted bitumen from June 12. Unlike gasoline and diesel imports, these oil products, that can be used to blend into road fuels, were previously exempt from import levies. The additional costs are expected to restrain China’s imports of these oil products, denting Asian MR trade, while boosting its domestic refinery throughput to meet the shortfall in import supply. This should bolster China’s crude consumption to the benefit of crude tanker demand.

China’s crude import demand, particularly for heavier grades, is anticipated to rise as some crude imports that were reportedly of sanctioned origins were previously listed as a “bitumen blend”, according to newswires. Alternative oil grades include sour crudes from the Middle East or Canada and the US (Cold Lake, Mars, etc), which if sourced would be supportive for tanker tonne miles. Still, with current talks between the US and Iran over a revival of their nuclear deal and an easing of sanctions, more Iranian crude could flow unsanctioned into China as the year progresses. A downside risk is if there is any delay in the next allocation of crude import quotas as some independent refiners have reportedly limited balance import quotas to accommodate crude imports that can no longer be classified as "bitumen blend".

The prospect of declining blendstock supply to make gasoline and diesel could tighten China’s domestic road fuel stocks. This would potentially weigh on China’s oil product exports in the short-term, at least until its domestic refinery output rises enough to meet the shortfall in import supply. In response to the news, our spot brokers have noted a rush of activity since last week fixing mixed aromatics supply from Singapore to China and LCO cargoes from South Korea, China’s largest LCO supplier. Consequently, Sing-Japan MR earnings rose to near five-month highs this week while SK-Sing rates have also edged up.

However, this rise in MR rates is set to be short-lived as once the tax rules kick in, China’s oil product import volumes are poised to decline. This would leave a surplus of LCO and mixed aromatics in the rest of Asia and this could pressure other Asian refiners, such as in South Korea, to reconfigure their refineries to produce more gasoil in place of LCO. Depending on the speed of Asia (ex-China)’s oil demand recovery and growth at that time, this would potentially weigh on other Asian refiners’ profit margins and cap their refinery runs.

 

Chinese Oil Product Imports (Bitumen, LCO, Mixed Aromatics)

Source: China Customs

 

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