As China cancels UCO tax rebate, buyers sort out contracts, alternate source

China's decision to end tax relief on exports of Used Cooking Oil will squeeze trade flows, lead to breach of contracts, and in the long run increase raw material costs for biofuel makers globally, thereby raising the competitiveness of China's own UCO-based biofuels, market participants said.

China announced sweeping changes to its export tax rebates for key commodities effective Dec. 1, sending shockwaves through markets on fears of reduced trade flows. In a statement Nov. 15, China's finance ministry said that from next month, it will cancel the 13% export tax rebate for chemically modified animal, plant or microbial oils and fats effective Dec. 1.

The ruling was mainly targeted at its UCO exports and would weaken its price advantage, China-based CITIC Securities said in a report Nov. 18.

China is the world's largest supplier of biodiesel made from used cooking oil as well as the raw feedstock itself. In 2023, the US was its largest buyer of UCO, while the EU was the largest buyer of UCO-based biodiesel.

Since the ruling, the price of UCO North Asia has jumped by around $100/mt from Nov. 19 to $1,000/mt Nov. 21, S&P Global Commodity Insights data showed. In the same period, the Platts assessed price of UCO FOB Straits rose to $950/mt Nov. 21, from $905/mt.

However, the spot price of UCO ex-mill North China, which represent local prices fell to $841/mt Nov. 21, from $930/mt on Nov. 15.

With the rebate canceled, the export cost of UCO will increase by approximately $103/mt, Kriti Dwivedi, assistant manager for exports to Chinese markets at Rossari Biotech Ltd said, adding that this could potentially reverse the growing exports of Chinese UCO.

As more UCO will remain in the domestic market, the shift could increase global competitiveness of China's UCO-based biofuels by raising raw material costs for overseas competitors, Dwivedi added.

Renegotiating contracts

Market participants are currently in wait-and-watch mode, with many focused on settling their export procedures in response to the tax rebate cancellation, sources said.

"Everyone is concerned about addressing the tax rebate issue and settling export procedures by November. They are not confident in doing new deals," a China-based trader said, adding that they do not intend to make any orders and would observe the market first.

"I heard some China UCO bulk suppliers already breached their contracts, so buyers need to find other sources to fulfill the quantity for loading," a source said.

China's new tax policy may shift the attention of UCO buyers to alternative sources in Southeast Asia, especially Malaysia, sources said, with many noting that traded volumes of Straits UCO have increased in the week.

"Currently, our US clients are buying quite aggressively and US EPA compliant UCO shipments at Malaysia's Port Klang are being offered at $1,000/mt level," a Malaysian UCO collector said.

"However, [Donald] Trump's reelection as US President will have a larger effect on Chinese UCO prices than the export tax rebate cancellation in the long run," the UCO collector said, adding that they are witnessing a surge in demand for Malaysian UCO recently.

China's biofuels push

Market analysts also cited China's renewed focus on its biofuels sector this year as a reason for the change in tax regime.

In August, China released its policy target for adopting Sustainable Aviation fuel for its aviation sector, with the requirement of using at least 2% SAF blend by 2025 and increasing to 15% by 2030.

For fulfilling the 2% SAF mandate, China might need around 2.5 million mt of SAF which means it would need well above 3 million mt of UCO as a feedstock, a market analyst said.

China shipped 2.12 million mt of UCO in the first nine months of 2024, higher than the 1.406 million mt exported in full 2023 calendar year, according to customs data.

China is also planning its first export quota for B24 biodiesel-blended marine bunker fuel for 2025, partly to support biofuel producers hit by EU antidumping tariffs earlier this year, market sources said.