CHINA DATA: Feedstock fuel oil imports to fall further in 2025 amid rising tax burden

China's independent refiners are likely to cut feedstock fuel oil imports further in 2025, after an 8% decline last year from a record high in 2023, due to rising tax costs, according to trade and refinery sources Jan. 8.

The independent refineries not qualified to have crude import quotas would struggle due to the increase in import tariffs and less deduction in consumption tax for fuel oil, sources added.

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

Their annual imports fell 8% year over year to 12.28 million mt in 2024. Fuel oil accounted for about 6.3% of their feedstock portfolio in 2024, largely unchanged from 2023.

The year-over-year drop followed the slump since October when the government said to tighten the implementation of consumption tax regulation on the barrels.

In December, fuel oil imports by independent refiners dropped 29.3% month over month to 410,000 mt, slumping by more than a half from the 1.02 million mt in September, S&P Global Commodity Insights data showed.

Tax burden up

The imports fell despite uncertainty over the tax implementation timeline, barring a clarification from the State Taxation Administration on Dec. 19.

The clarification stated that refiners will be able to offset only the consumption tax levied, equivalent to the actual yield of taxable products, and will have to bear the remaining tax burden.

The move will increase at least Yuan 400-500/mt ($54.59-$68.24/mt) tax burden on the barrel when accounting for gasoline, gasoil as the main taxable products, refining sources reckoned.

Some sources in Binzhou city, Shandong province, said they would only deduct 80% of the consumption tax on fuel oil as per the local government directive based on their gasoline, gasoil yield. In comparison, their current deduction is 100%.

Moreover, China has raised its fuel oil import tariff to 3% from the current 1%, effective Jan. 1.

Refining sources said the higher tariff would result in a cost increase of Yuan 60-100/mt ($7.89-$13.70/mt), further dampening import interest.

2025 outlook

As procurement costs for fuel oil are projected to rise, some teapots, restricted from processing imported crude, face significant limitations in their feedstock options.

"We are left with few alternatives and will likely continue using fuel oil for the time being," said a source from an independent refinery.

With no access to imported crude, combined with weakening demand for oil products and escalating feedstock prices, these refineries are expected to face increasingly difficult operational conditions in 2025.

In comparison, independent refineries with crude import quotas will find themselves in a favorable spot, potentially allowing them to import fuel oil despite the anticipated cost increases.

Market activity has also shown limited offers for Russian M100, a popular fuel oil grade among China's independent refiners. Recent estimates indicate that the offer level for this grade was around $65-$70/mt against 380 CST HSFO Mean of Platts Singapore assessment, while Iranian 280 CST fuel oil is being offered at premiums of around $20/mt on the same basis.

The average refining margins for processing imported crudes by Shandong independent refineries fell to around Yuan 292/mt ($5.5/b) in 2024 from Yuan 813/mt ($15.2/b) in 2023, data from OilChem showed.

Sinopec expects the independent sector to see 6 million-10 million mt/year of refining capacity shut down in 2025 due to narrowing margins and heightened competition.

Top feedstock imports for China's independent refiners (000 mt)