Rising fuel oil tax burden forces Chinese independent refineries to scale back operations

The increased tax burden on imported feedstock fuel oil has forced some Shandong-based independent refineries in China to shut their primary facilities in February, potentially threatening their survival, refinery and trade sources told Platts on Feb. 20.

Since Jan. 1, China has allowed refiners to offset just 40% to 80% of its Yuan 1,218/mt ($167.14/mt) consumption tax on fuel oil imports based on the yield, compared with a 100% rebate previously. China has also raised its fuel oil import tariff to 3% in 2025 from 1% previously, resulting in a cost increase of Yuan 60-100/mt ($7.89-$13.70/mt).

Fuel oil serves as a crucial alternative feedstock for small independent refineries in Shandong, commonly referred to as "teapots," especially for those restricted from processing imported crude oil.

Shandong-based independent refineries are scaling back operations despite boosting their feedstock fuel oil imports by 37.6% from December to about 564,000 mt in January, Platts data from S&P Global Commodity Insights showed.

The average utilization rate of independent refineries without crude import quotas across the country dropped to a record low of about 16% as of Feb. 8, according to the local information provider OilChem. This represents a year-over-year reduction of about 6 percentage points, and independent refiners are anticipated to operate at reduced rates in the near term.

OilChem covers 49 independent refineries, which are prohibited from processing imported crude, located in coastal or landlocked provinces, with a total primary capacity of 82.8 million mt/year. The information provider noted that 27 of these refineries are operating as usual because they have access to domestically produced crude oil.

Tax burden

Four plants in Shandong with a combined primary refining capacity of 11.1 million mt/year (222,000 b/d) have shut their crude distillation units due to losses incurred from processing fuel oil, sources from these refineries said.

The four plants are currently only operating some secondary units at relatively low operation rates, using residues and vacuum gasoil as feedstock, the sources said.

A 3 million mt/year plant, among the four refineries, halted its CDU operations in the second half of January with no plans to resume currently, and also suspended the purchase of feedstock fuel oil due to the significant tax burden, a company source said.

An independent refiner with a crude import quota said that they will be allowed to offset just 40% of the consumption tax burden, while a few others reported offset ratios slightly above 70%, with the highest nearing 80%.

"Teapots have been almost absent from the market. [There is] no demand [for fuel oil] at this moment," said a source with an independent refinery based in Zibo, eastern Shandong province.

Weak demand from the refineries has led Russian M100 fuel oil offers to slump to premiums of about $20-$30/mt against the Mean of Platts Singapore assessment in mid-February, from premiums of $60-$70/mt in January, according to several Shandong-based market sources.

"Those with a relatively higher offset ratio may remain in the market to buy fuel oil for feedstock when there is a refining margin. But those with lower ratios may struggle unless some other competitive alternatives are found," said a fuel oil trader.

A source from another independent refinery said that it is not feasible to shut the refinery and lay off workers, but continuing operations is also unprofitable, which presents a dilemma.

Other refinery sources said that operating only secondary units with semi-products is unsustainable and cannot be maintained for long.

"Those independent refineries may still need to procure fuel oil as a feedstock at some time, but all depends on the refining margins," an analyst in Shandong said.

Bitumen blend

Feedstocks declared as bitumen blend are subject to a heavier tax burden than fuel oil, as their offset ratios are lower due to the typical 40%-50% yield for gasoline and gasoil, according to market sources.

Bitumen blend is, in fact, Venezuelan Merey crude relabeled off Malaysian waters. Those without crude import quotas have used it as a feedstock to produce asphalt as the primary product instead of gasoline and gasoil.

In January, Chinese independent refineries imported about 1.144 million mt of Venezuelan crude, reported as originating from Malaysia, marking a 32.2% increase compared with the 865,000 mt imported in December, according to Platts data.

The data showed that about 1 million mt of these imports were declared as bitumen blend in January, surging from 278,000 mt in December, while the remainder were declared as crude.

The sources said the heavier consumption tax has dampened interest in importing Merey crude as a bitumen blend in the foreseeable future.

"Demand from those without crude import quotas has almost vanished. Only thin demand remains from some crude import quota holders who can use the quota to declare the barrels as crude oil," said a Shandong-based trader.

Prices for bitumen blend were heard at a discount of around $5-$6/b against the ICE Brent futures on a DES Shandong basis, largely stable compared with a month earlier.