Shandong independent refineries restart CDUs as fuel oil prices fall; tax issues loom

Independent refineries in China's Shandong province have begun restarting their crude distillation units (CDUs) following a recent decline in fuel oil prices, refinery and trade sources told Platts on March 6, signaling a tentative recovery in the sector.

However, the restart of operations comes amid ongoing challenges posed by a heavier tax burden on imported fuel oil -- a key feedstock for refineries without crude import quotas.

A few independent refineries in Shandong shut their CDUs in late January due to the soaring costs of imported fuel oil, a direct result of heavier consumption tax regulations that took effect on Jan. 1, 2025, leaving only secondary units operational with outsourced feedstock. These regulations led to a 20%-60% increase in consumption tax on fuel oil used as feedstock, making it uneconomical for many refineries to operate.

Starting from late February, independent refineries with a combined refining capacity of 178,000 b/d began restarting their CDUs as fuel oil prices declined. One such refinery, located in Dongying, resumed operations after a monthlong shutdown.

According to a source familiar with the matter, the refinery still had leftover fuel oil stocks from January and received two small cargoes in February, with additional shipments expected in March.

"It's probably better to produce feedstocks for secondary units internally rather than outsourcing," a trade source said, highlighting the improved economics of restarting operations amid lower fuel oil prices.

Fuel oil prices and market dynamics

Russian M100 fuel oil was offered at a premium of around $20/mt against the Mean of Platts Singapore 380 CST HSFO assessment on a DES Shandong basis in early March. This marks a significant drop from the $60-$70/mt premium seen in mid-January when the new tax rules were implemented.

Sources estimated that the overall cost of using fuel oil could have fallen by about Yuan 300-400/mt ($41-$55/mt) compared to mid-January, making it feasible for some refineries to resume operations.

Despite the price drop, not all refineries are rushing to restart. Sources noted that the overall cost of using fuel oil remains high compared to crude oil, making it uneconomical for many refineries, particularly those with crude import quotas.

Data from local energy information provider JLC showed that the average utilization rate edged up by 0.75 percentage points week over week to 51.2% as of March 5, following slightly higher refining margins.

Deduction ratios and refining margins

Refineries with higher consumption tax deduction ratios -- a measure of feedstock cost -- are more likely to restart operations. For example, the Dongying-based refinery has a deduction ratio of close to 80%, while others operate at slightly over 70% or as low as 50%-60%.

"It is likely for those with higher deduction ratios to start up first, which will bring lower production costs, as all still depends on the refining margins," a refinery source explained.

A few other refineries without crude import quotas are also considering restarting their CDUs if they can achieve breakeven or better margins. However, the decision ultimately hinges on the stability of fuel oil prices and refining profitability.

Sharp drop in fuel oil imports

The impact of the new tax regulations is evident in the sharp decline in fuel oil imports. Fuel oil imports by Shandong's independent refineries plummeted to a 17-month low of around 257,000 mt (1.63 million barrels) in February, marking a 54.4% decline compared to January, Platts data showed.

This steep drop underscores the challenges faced by refineries reliant on imported fuel oil, as the new tax regime has made processing this feedstock significantly more expensive.

While the restart of CDUs by some refineries signals a tentative recovery, the sector continues to face significant headwinds. The tightened tax regulations remain a major burden for refineries reliant on fuel oil, and the market remains volatile. Refineries with higher efficiency and better access to alternative feedstocks, such as crude oil, are better positioned to navigate the current environment.

The coming months will be critical for Shandong's independent refineries as the market adjusts to the new tax regime and fluctuating prices. The sector's ability to adapt to these challenges will determine its trajectory in 2025 and beyond.