China’s independent oil refiners are once again using fuel oil to
feed their plants as stricter tax enforcement and rising crude oil
prices have squeezed their margins.
These independent refiners,
nicknamed teapots, buy nearly one-fifth of China’s crude imports and any
reduction in their crude purchases would cap demand in what is now the
world’s biggest oil importer.
Two independent refiners based in
the eastern province of Shandong, home to most of China’s teapots, have
each bought an 80,000 ton cargo of straight-run fuel oil (SRFO) cargo,
together totaling about 1.02 million barrels, for April and May
delivery, according to three traders with knowledge of the deals.
One
cargo is arriving from Abu Dhabi and the other from Singapore, said one
of the sources, an executive with a western trader involved in the
supply talks.
The independents had primarily used straight-run
fuel oil, the residue left after crude oil has been initially distilled
in a refinery, as a feedstock for their plants since it cost less than
crude oil and was taxed less. However, in 2014, the Chinese government
raised taxes on fuel oil imports. But, that was followed in 2015 by
teapots winning licenses to import crude.
Straight-run fuel oil
consumption slumped as the refiners bought crude oil, which yielded a
higher volume of higher-value products such as gasoline and diesel than
the SRFO when processed and boosted profit margins for the teapots.
China remained a large buyer of so-called cracked fuel oil as fuel for
ships. [O/CHINA3]
However, starting on March 1, Beijing enacted
new tax rules that more rigidly enforced on the teapots the collection
of a $38 per barrel gasoline consumption tax and $29 per barrel tax on
diesel.
Combined
with a recent surge in crude oil prices to their highest since 2014,
the higher tax collection has crushed the independent’s margins. That
has prompted the renewed interest in lower-priced fuel oil.
To view a graphic on China's crude oil imports, click: reut.rs/2KJ2tuv
“Buying
SRFO may not necessarily save tax cost as the buyer needs to pay
up-front the (fuel oil) consumption tax, but obviously plants are
exploring the old trade as the government’s tax stick is really a hard
one this time,” said the oil trading executive.
Processing the
SRFO does have an added tax benefit, however. The independents can
deduct the tax of about $31 per barrel paid on their fuel oil imports
from the consumption tax they are required to collect on their gasoline
and diesel sales, said an official with an independent plant seeking
fuel oil.
“Processing
fuel oil gives better margins than (refining) crude oil as plants can
get tax deducted (when selling refined fuel) later,” the official said.
The
source, who declined to be named as he is not authorized to talk to
press, added that his plant expected margins to be negative if they only
processed crude oil.
The lower margins have resulted in the teapots cutting their run rates.
In
early May, the independent refiners operated at only 63 percent of
their processing capacity, the lowest since February during the Lunar
New Year break, according to a weekly survey of 38 plants by
Shandong-based consultancy Sublime China Information. Planned
maintenance was also a factor, said Gao Lei, an analyst with Sublime.
“We’ve
seen less impact (from the tax measures) on import volumes as state-run
plants increase runs, but more on teapot margins,” said Seng-Yick Tee,
of consultancy SIA Energy,
“They are definitely making less money now than before.”
To view a graphic on China’s teapot refinery runs rate, click: reut.rs/2GGnvaR
Additional reporting by Roslan Khasawaneh and Florence Tan in Singapore; Editing by Christian Schmollinger
Our Standards:The Thomson Reuters Trust Principles.
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