China likely to slow LCO imports on higher tax risk ahead

Singapore — China is likely to slow its import of light cycle oil, or LCO, in the coming months amid possibly tighter policies and slimmer profit, trading sources told S&P Global Platts in the week ended Nov. 13.

LCO is a common blendstock for gasoil and it is used in the mining, construction, fishing, industry and agricultural sectors. A metric ton of domestic kerosene blended with imported LCO can yield 2-2.5 mt of gasoil.

Currently, China's demand for December-delivery LCO cargoes remains strong, with the premium to purchase these cargoes, against the Mean of Platts Singapore gasoil assessments, rose to about $7.50/b Nov. 17, from a premium of about $6/b a week ago, market sources said.

However, a southern China Guangzhou-based LCO importer said: "We have been cautious about LCO imports, so do some old players, due to talk that the fuel would attract consumption tax as early as January. The current buying wave may be efforts at bringing in the cargoes before the possible [deadline]." He added that local customs has already tightened supervision.

"Actually, domestic sales is not strong, and the domestic price for LCO is lower than the import cost of about Yuan 3,200/mt," the importer said .

In recent years, there had always been talk of tightening restrictions and levying consumption tax on LCO.

"But the hefty profit and the surge in import volumes attracted more attention this year than ever, as state-owned refineries are struggling from refining losses," an eastern China Nantong-based trading source said.

With Beijing increasingly calling for fair competition, the chances of the fuel attracting a consumption tax has gone up, market sources said.

LCO imports are free from consumption tax, while it is easy to avoid paying the tax for LCO-blended gasoil. In comparison, gasoil produced from refineries, or directly imported, attracts a Yuan 1,411/mt ($28.58/b) tax.

More importantly, LCO importers and blenders do not pay the government's Price Adjustment Risk Fund this year, leaving their pockets deeper than that of their refining peers. Among others, state-owned Sinopec and PetroChina are prepared to contribute Yuan 13 billion and Yuan 11.7 billion, respectively, for the fund in H1.

In China, the ceiling for retail gasoil prices is adjusted in line with the movement in a basket of international crude prices within the $40-$130/b range. When crude prices fall below $40/b, producers of oil products are required to contribute the additional revenue earned from higher oil product prices to the government's Price Adjustment Risk Fund due to the suspension of the retail ceiling price adjustments.

High LCO imports

China's LCO imports have been hovering above the 1 million mt mark since April, when crude prices were below $40/b.

Since April, China's gasoil price has remained above international market prices, which resulted in LCO inflows hitting a historical high of 1.59 million mt in September, leaping 62.1% from a year ago, latest data from the General Administration of Customs showed. In January-September, the volume accumulated to 10.73 million mt, rocketing 90.4% year on year.

"China's appetite was so big, which was an opportunity for refiners in the region amid the pandemic. We saw many new suppliers this year, which never produced LCO before," a South Korean-based supplier said.

The influx of LCO does not result in smooth domestic sales as in earlier this year as China's actual gasoil demand was weaker than expected over September-October amid weather vagaries such as summer floods and typhoons, in addition to COVID-19.

CHINA'S TOP LCO SUPPLIERS ('000 MT)

Source: General Administration of Customs