PX supplies in China likely to tighten post fuel oil import tax hike

China's production of aromatics, such as paraxylene and gasoline, could tighten in the coming weeks as some independent refiners may avoid purchasing fuel oil used as a feedstock following the imposition of import taxes, sources told S&P Global Commodity Insights.

Fuel oil serves as an important alternative feedstock for small independent refineries in Shandong, known as "teapots," particularly for those prohibited from processing imported crude oil.

China has raised its fuel oil import tariff to 3% from the current 1%, effective Jan. 1 which would result in a cost increase of Yuan 60-100/mt ($7.89-$13.70/mt), Commodity Insights previously reported.

A trader in Singapore said the impact would likely be felt in the production of refined products such as gasoline and aromatics such as paraxylene.

"Those new private refineries in China are cracking heavy fuel oil [so] if fuel oil [import] tax is increased, that raises costs," the trader said.

PX producers in Asia are eyeing more spikes in prices on the expectations of a further cutback in supplies, sources said.

"It seems to be good news for PX," a trader in China said.

PX prices have recently risen to multimonth highs as producers in Asia have hit the brakes on production while future turnarounds in the region could further crunch supplies, the Chinese trader said.

Platts, part of Commodity Insights, assessed Asian paraxylene as up $13/mt day over day at $901.33/mt CFR Taiwan/China Jan. 16, the highest since Oct. 8, 2024, when prices were assessed at $916/mt.

"More and more PX units [are] cutting their operation rates," a PTA producer in Asia said.

Outside of North Asia and Southeast Asia, producers in the Middle East and India could also potentially lower their production of PX and focus instead on gasoline if Asian supplies are hit, the trader in Singapore noted.

So far, the impact on PX supplies looks fairly minimal but if the blending demand from the US ahead of the summer driving season shoots up, the tightness will make prices skyrocket, the Chinese trader said.

"The impact [so far]is small, more impact may be [from] USA [side if] gasoline demand [goes] up," he said.

Over the past few years, the summer driving season in the US has evolved into a real boom phase for Asian aromatics owing to the high demand for blending components.

Sources said Chinese gasoline exports were expected to fall to 400,000 mt in February from an estimated 800,000 mt in January.

However, the impact of lower Chinese gasoline exports on gasoline prices was expected to be moderated by additional inflows from South Korea and the Middle East, some market participants cautioned.

"I don't think the drop in Chinese exports will impact the market significantly as inflows from other regions could make up the shortfall," a second trader in Singapore said.

Fuel oil price surge creates dual challenges

Amid market expectations that China's feedstock demand for straight-run fuel oil will take a hit due to the recently imposed higher import taxes, a recent rally in Asia's high sulfur fuel oil prices could weigh a two-fold blow for the refiners.

The benchmark Singapore 380 CST HSFO cargo prices, which was assessed at $491.70/mt at the Asian close on Jan. 16, have surged nearly 11% in the last one month, while trade sources were expecting further upsides going forward amid tighter near-term supplies due to the recent US sanctions on Russia's energy industry.

Although the Asian fuel oil market remains wary of weaker feedstock demand from China going forward, trade sources said any major impact was yet to be seen and the current HSFO fundamentals were more driven by expectations of tighter availability.

The majority of Russian fuel oil production is high sulfur, and the fresh sanctions will help the HSFO premiums jump, said one Singapore-based trader, while another trader added that the market was still looking for cues on how badly the Chinese tariff hike will impact the overall market in coming days.

The Singapore 380 CST HSFO February-March market structure was pegged at $6.75/mt in midafternoon Asian trading on Jan. 17, up from the Platts assessment of the spread at $6.45/mt at the Jan. 16 Asian close. The M1-M2 intermonth spread for the benchmark HSFO grade has more than doubled its backwardated structure so far this week, Commodity Insights data showed.

Commodity Insights reported earlier that the wider Asian HSFO market is expected to find tailwinds in 2025, as a continued rise in scrubber-installed ships bolsters healthy bunker consumption amid limited non-sanctioned supplies.