New Chinese tax law threatens oil refiners across the region.
Just last month ago, on May 14, China announced a new tax on consumption of mixed aromatic.
The light cycle oil and bitumen blend, set to be instituted less than one month later on June 12.
Now that that start date has rolled around, analysts are keeping a sharp eye on Chinese oil consumption to see what impact that the consumption tax of Yuan 1,218 mt/mt (approximately $190 mt/mt) will have on the country which consumes the second greatest amount of oil per annum in the world, second only to the United States.
At present, China consumes 11.75 million barrels of oil each and every day, a staggering amount which represents about 12 percent of total consumption worldwide. But the new tax laws are not necessarily aimed at curbing this consumption, despite the fact that China will have to start consuming a whole lot less oil in a big hurry if they are to reach their own ambitious emissions targets — Chinese president Xi Jinping announced last year that not only would his country reach peak emissions by 2030 as was already pledged under the Paris climate accord, but would also reach carbon neutrality by just 2060.
This pledge, while absolutely necessary for reaching global emissions targets to avoid the worst effects of catastrophic climate change, is a highly ambitious one that will require plenty of pushing from the government, to the effect of both carrot and stick.
While on the surface this new consumption tax might appear to fall directly into the stick category, it’s actually an attempt to close an existing loophole in the Chinese tax system. The targeted petroleum products — mixed aromatics, light cycle oil and bitumen blend — are a collection of blend stocks and feed stocks used in the production of gasoline and gasoil and in processes carried out by independent refiners.
The new tax imposed on these products “is expected to have repercussions not only in the domestic market, but also in the regional refined products market and crude markets,” S&P Global Platts reported shortly after the taxes were announced last month.
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The move, however, may end up punishing end-users more than anyone else. “Independent refineries would rearrange their tax cost allocation among their feedstock slate, and partly pass the new tax cost to oil product end-users if they need to import those heavy crudes,” a Beijing-based analyst told S&P Platts.
The new taxes are expected to have a particularly acute chilling effect on China’s imports of bitumen blend, which is an essential feedstock to produce asphalt. Prohibitively expensive asphalt costs could come as a major blow to certain sectors of the Chinese economy as the nation tries to pave their way out of the pandemic-induced rescission.
As of April, imports had reached a relatively high point of 2.41 million mt, a number which is now projected to fall sharply on the heels of this week’s tax imposition.
Indeed, the new taxes are likely to make imports of all of the impacted petro-products financially non-viable. “All eyes will be on how buyers in China move to fill the vacuum created by this policy change,” S&P Global Platts’ Senior Editor Shashwat Pradhan said in this week’s episode of Platts Market Movers Asia. “Chinese buyers will actively be looking for alternative supplies to overcome the roadblock created by the tax.”
Discouraging imports, however, has been a central part of China’s game plan for their future energy landscape. Even the country’s ambitious emissions-curbing goals, which are purportedly designed to fight global climate change, are almost certainly far more related to China’s desire to become energy secure and energy sovereign, according to many industry analysts and experts.
