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ANALYSIS: China's surprise consumption tax move creates room for additional crude inflows


State refiners to import bigger share of incremental barrels

More crudes with higher gasoil yields likely to flow in

Independent refineries to seek replacement for Merey crude

  • Author
  • Analyst Oceana Zhou    Pankaj Rao    Analyst Daisy Xu
  • Editor
  • Manish Parashar
  • Commodity
  • Oil Metals Petrochemicals

Singapore — China's surprise move to slap a consumption tax on imports of light cycle oil and mixed aromatics will force refiners to boost output of these products at home, which could lead them to ship in incremental crude oil cargoes as well as divert some feedstock from other oil products.

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Analysts said a bigger share of those incremental barrels will be shipped in by the state-run refiners, while independent refiners would account for relatively smaller volumes.

Beijing said in the week ended May 14 it will impose a consumption tax on the two imported materials from June 12, making gasoil barrels blended from imported LCO and gasoline barrels blended from mixed aromatics less competitive compared with volumes produced by domestic refiners.

The shift in domestic production patterns has prompted greater yearning for crude oil imports, with Chinese refineries being primary contenders to absorb the additional volumes.

China's crude imports was at 10.97 million b/d in January-April, up 8% year on year, data from General Administration of Customs showed.

State-owned to take lead

The country's state-owned refineries are expected to take the lead in boosting imports instead of independent refineries, a Singapore-based analyst said.

"The consumption tax on bitumen blend will force the independent refineries to use their crude import quota to buy feedstock to produce asphalt, until they find another way to get around," he added.

Imports of bitumen blend, which is mainly Venezuelan Merey crude and does not require an import quota, will be subjected to the consumption tax from June 12.

"Teapot [independent refineries'] purchase is limited by import quota. In fact, the government is investigating illegal quota business, which will make teapots purchase less," said a crude oil trader with a north Asian refinery.

Beijing allocated 118.52 million mt of crude import quota to 43 qualified refineries for 2021. About 50% of the quotas have been used for crude imports over January-April, S&P Global Platts data showed. Market sources expected that the government would allocate the second batch of quota -- around 71 million mt -- in June-July.

Higher gasoil yield crudes

The crudes having a higher gasoil yield, such as Middle Eastern crudes, Russian ESPO and Brazilian Tupi, are more favorable to make up for the supply reduction, China-based market sources said.

Partly due to the flood of LCO eating away the market share of domestically produced gasoil barrels, China's gasoil yield fell to 21.7% in the first quarter from 24% in Q1 2020, data from the National Bureau of Statistics showed.

The premiums for July delivery Tupi cargoes have been offered around $1.80-$2.10/b against ICE Brent futures on a DES Qingdao basis May 19, while ESPO was around $2.20/b on the same basis. Both were slightly higher than a few days ago, according to independent refinery sources.

Middle Eastern crudes

Buoyed by an expectation of uptick in crude imports, the cash Dubai premium over same-month Dubai futures spread has jumped nearly 60 cents/b over the past few days while averaging $1.13/b in May so far, compared with $1.04/b in April , S&P Global Platts data showed.

The focus remains on China to sustain demand for Middle Eastern crude amid rising coronavirus outbreaks across key Asian economies.

The "biggest disruption is for S Korean refiners as it [LCO exports] was a way of getting around subnormal refining margins," said the trader in Singapore. South Korea is the biggest LCO supplier to China, taking up more than 60% of the market share.

Market participants said it would take some time to fully absorb the implication on the Middle East crude oil market.

"Brent/Dubai has been wide for a while and Dubai priced crudes look reasonable value. Sanctioned Iranian and Venezuelan is more expensive now because if they call it bitumen they have to pay more tax," said another crude oil trader in Singapore.

Heavy crudes

Meanwhile, Chinese independent refineries are expected to look for heavy crudes to replace Venezuelan Merey, which was imported as a bitumen blend, to meet asphalt production.

Asphalt demand is expected to improve as the construction season approaches, encouraging refineries to look for competitive feedstock.

"Merey would continue to flow into the independent sector in the blended cargoes, such as Nemina and Malaysia Blend, but the volume is unlikely to reach the levels when bitumen blend was competitive," a Shandong-based refiner said, adding that it has to get Basrah Heavy, Cold Lake or other heavy crudes.

China's planned consumption tax on imports of some products:



Import quota required

Average monthly imports

Top supplier

Consumption tax

Tax effective

Light cycle oil

For blending to make gasoil


1.5 mil mt

South Korea


June 12

Mixed aromatics

For blending to make gasoline


630,000 mt



June 12

Bitumen blend

Used to produce asphalt


1.8 mil mt



June 12

Source: S&P Global Platts