China independent refiners likely to boost fuel oil imports as deduction ratios rise

The likelihood of increased fuel oil imports as a supplementary feedstock by China's independent refineries, primarily located in eastern Shandong province, has risen, refinery and trade sources told Platts, part of S&P Global Commodity Insights, on June 26.

This shift follows market discussions suggesting the local government tax office plans to raise the deduction ratio for the consumption tax levied on fuel oil used as feedstock for producing oil products. Refinery sources said the adjustment is expected to improve the economics of cracking fuel oil as a supplementary feedstock.

Approximately six independent refineries in Shandong will serve as pilot facilities for implementing higher deduction ratios. According to refinery sources, the ratio is likely to increase by about 20-25 percentage points, raising it from the current level of approximately 50-70%.

"For those with lower ratios, the increase could be around 25%, while those at 60-70% may see a smaller incremental increase," said a refinery source in Dongying, one of the pilot locations.

The adjustment would allow a higher percentage of the consumption tax levied on fuel oil to be passed on to finished products, making it more likely for independent refiners to use fuel oil as a supplementary feedstock, particularly when crude import quotas are limited, market sources said.

Implementation date

However, "there is no document issued by the local tax office stating when the implementation will start," said another refinery source. Most of these refineries hold crude import quotas, making it premature to determine whether independent refiners without quotas could benefit from the new consumption tax regulations.

Fuel oil is typically used as a supplementary feedstock by independent refineries facing crude import quota shortages.

"It's possible that some refineries may import a few cargoes as supplementary feedstock, but it all depends on the deduction ratios. If the ratio is not close to 100%, some independent refiners may still refrain from using fuel oil," said a third refinery source in Dongying.

Independent refineries, on the other hand, continue to operate at a relatively low run rate of below 50% due to weak refining margins.

Data from JLC showed the average utilization rate at Shandong's independent refineries was 48.51% as of June 25, down 0.41 percentage points week over week. Refining margins for cracking imported crude rose Yuan 44/mt to Yuan 146/mt as of June 25.

Stable Russian FO prices

Meanwhile, market sources said the price of Russian M100 fuel oil remained stable at $20-$25/mt against the Mean of Platts Singapore 180 CST HSFO assessment, consistent with levels from a month earlier.

"There might be some buying interest emerging, but it hasn't yet translated into firm deals," said a source.

In the first five months of the year, China's independent refiners imported 1.55 million mt of fuel oil, a substantial 78.5% year-over-year decline, Platts data showed.

This decrease in imports can primarily be attributed to the higher consumption tax deduction ratio, which has made it less economically viable for independent refiners to crack the feedstock due to relatively higher costs compared to the previous year.

"The supply of fuel oil has generally been sufficient this year; the main reason for the reduced imports is the higher consumption tax cost," said a trade source.

This situation also means that China's independent refiners are facing a rapid depletion of crude import quotas, as they need to import more crude with their quotas this year compared to 2024.

"That's why there have been several discussions in the market about increasing the consumption tax deduction ratio, as refiners with tight crude import quotas still expect to import fuel oil as an alternative feedstock, especially toward the end of the year," said another trade source.