New Chinese Tax Law Threatens Oil Refiners Across The Region

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Just last month, on May 14th, China announced a new tax on the consumption of mixed aromatics, light oils and bituminous mixtures to be introduced less than a month later on June 12th to keep a close eye on Chinese oil consumption to see what impact the consumption tax of 1,218 yuan / mt / mt (about $ 190 million / mt) will have on the country that consumes the second largest amount of oil Oil per year second in the world after the United States. China currently consumes 11.75 million barrels of oil a day, a staggering amount accounting for about 12 percent of total global consumption. But the new tax laws aren’t necessarily aimed at curbing that consumption, even though China will need to use much less oil very quickly to meet its own ambitious emissions targets – China’s President Xi Jinping announced last year that his country would not only achieve peak emissions by 2030, as already promised in the Paris Climate Agreement, but would also achieve CO2 neutrality by 2060. While this commitment is absolutely necessary to meet global emissions targets to avoid the worst effects of a climate catastrophe, it is a very ambitious change that will require a lot of pressure from the government, both carrot and stick.

Although this new consumption tax on the surface seems to fall straight into the stick category, it is actually an attempt to close an existing loophole in the Chinese tax system. The targeted mineral oil products – Mixed aromatics, light oils and bitumen mixtures – are a collection of mixtures and feedstocks that are used in the production of gasoline and gas oil and in processes of independent refineries. The new tax levied on these products “is expected to have an impact not only on the domestic market, but also on the regional refined products and crude oil markets,” S&P Global Platts reported shortly after the tax was announced last month.

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However, the move can result in end users being penalized more than anyone else. “Independent refiners would switch their tax cost allocation to their commodity list and pass some of the new tax cost on to end users of oil products if they had to import these heavy crude oils,” a Beijing-based analyst told S&P Platts.

The new taxes are expected to have a particularly strong deterrent effect on China’s imports of bitumen mixtures, which are an essential raw material for making asphalt. Unaffordable asphalt costs could deal a severe blow to certain sectors of the Chinese economy as the nation tries to pave the way out of the pandemic lift. In April, imports had reached a relatively high level of 2.41 million t, a figure that is now expected to decline sharply this week due to the tax levy.

Indeed, the new taxes are likely to make imports of all the petroleum products concerned financially unprofitable. “All eyes will be on how shoppers in China fill the vacuum created by this policy change,” said Shashwat Pradhan, senior editor of S&P Global Platts the episode this week by Platts Market Movers Asia. “Chinese buyers will be actively looking for alternative offers to overcome the hurdle caused by the tax.”

However, the discouragement of imports has been a central part of China’s game plan for its future energy landscape. Even the country’s ambitious emissions curb targets, which are supposed to fight global climate change, almost certainly have a lot more to do with more China’s desire for energy security and energy sovereignty, so many industry analysts and experts.

By Haley Zaremba for Oil Genealogie

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