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China's ethanol inflow hit by import policy fears, lower domestic prices

Singapore — China's demand for ethanol imports has taken a hit, resulting in lowerprices over recent weeks, as buyers have backed off amid possible importrestrictions and higher domestic supply, industry sources said Friday.

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Trading activity in the import market has almost ground to a halt, withbuyers holding back on new purchases amid mounting anxiety that the centralgovernment might introduce measures to curb rising inflows, in tandem withpolicies to boost domestic production.

In particular, there was widespread speculation that levies for denaturedethanol might be hiked, and also guidelines would be revised restricting thelist of acceptable denaturants for cargoes entering the country.

The measures were said to be due for implementation with effect fromJanuary 2016.

As a result, a trader said that some end-users have instructed sellers toexpedite existing shipments for arrival before Christmas, in order to avoidbeing caught up by any possible rule changes.

Import prices have fallen as well, with the fuel-grade variant currentlyoffered at $610-$615/mt on a CFR China basis, sources said. This compares tolevels above $650/mt heard during early October.

Currently, denatured ethanol attracts a 5% import duty on top of aseparate value-added tax, which stands at 17%.

While the tariff for undenatured ethanol is much steeper at 30%,virtually all imports in that category originate from Pakistan, which areexempted from import duty in China, according to official data.

Therefore, the bulk of imports have effectively enjoyed relatively lowduties, giving them a clear edge over pricier domestic cargoes. DOMESTIC SUPPLY RISES ON LOWER FEEDSTOCK COST

Another reason cited by sources for the lack of import demand was a risein domestic supply, due to lower prices of feedstock corn.

The government had recently lowered the guaranteed corn purchase pricefrom Yuan 2,200/mt ($344/mt) to Yuan 2,000/mt on higher stocks.

Ethanol producers in the northeastern provinces are the mainbeneficiaries, as corn is the predominant feedstock in that region.

Along with a local government subsidy to incentivize ethanol production,this has resulted in local producers increasing run rates as the productregains profitability. Consequently, domestic ethanol prices have also adjusted downwards overthe past month.

Ex-factory prices for corn-based hydrous ethanol from Heilongjiang werecurrently heard at around Yuan 5,000/mt ($781/mt), local sources reported,while cassava-based product had fallen to around Yuan 4,900/mt in Jiangsuprovince. This was at least Yuan 400-500/mt lower than levels seen prior tothe lowering of corn prices, sources said. MARKET DIVIDED ON THE FUTURE OF IMPORTS

China's ethanol imports in October fell from an all-time high inSeptember, as inflows of fuel-grade denatured ethanol slid by nearly 70%. Total imports in October stood at 68,961 cu m, according to official datafrom the General Administration of Customs released earlier this week.

Imports from the US were down 33% to 27,805 cu m, while Brazilian importsplunged 93% to just 3,164 cu m. However, imports of denatured ethanol remainat historically high levels despite the month-on-month fall, with 167,313 cu mentering China over January-October 2015.

There were differing opinions on the significance of October's fall inimports.

Some felt that this marked an adjustment back to the norm of relativelylow imports, and said that imports had already reached their peak inSeptember, when the arbitrage from the Americas was at its widest. They suggested that the rise of imports in recent months was just aone-off move, and would be difficult to repeat given likely tightening inofficial policy. "From what I gather, there would be less cargoes arriving in China inNovember and December," a source from a Western trading house said.

However, others were more upbeat and reckoned that imports will continueto lure Chinese buyers given that the arbitrage remained open.

"Customers are definitely still interested to buy from overseasnotwithstanding their concerns ... I believe the dip is just temporary," asecond source said.

A trader for an Asian company said: "Imports will certainly continue torise next year if talk of policy changes turns out to be unfounded."

--Toh Wei Zheng, wei_zheng.toh@platts.com--Edited by Geetha Narayanasamy, geetha.narayanasamy@platts.com