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China to cut tariff on imports of US crude to 2.5% from 5%: State Council

Highlights

Tariff rate cut will take effect February 14, 1:01 pm Beijing time

Medium sour US grades may appeal to independent refiners

Coronavirus and remaining tariff hamper near-term US crude demand

Singapore — China plans to cut the tariff on imports of US crude oil by 2.5 percentage points, the State Council's Tariff Commission said Thursday, paving the way for Asia's biggest energy consumer to reclaim its status as the region's top North American oil customer.

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The latest cut takes the import tariff rate on US crude to 2.5% from 5%, and it will take effect from 1:01 pm Beijing time (0501 GMT) February 14, according to a statement by the State Council's Tariff Commission published on the Ministry of Finance website.

The statement indicated that the tariff rate cut would help boost trade between the US and China. This marks the first official announcement on tariff reduction since China agreed to buy $52.4 billion of US energy products over 2017 levels in 2020 and 2021 as a part of the US-China Phase 1 trade deal signed on January 15.

ASIA'S TOP BUYER

China was ranked as Asia's biggest customer of US crude in 2018, but it surrendered the top spot to South Korea last year amid an escalating trade dispute with Washington.

In retaliation to the US government's 10% tariff on Chinese goods announced on August 15 last year, Beijing announced a 5% tariff on US crude imports from September 1, as part of a new round of tariffs on $75 billion worth of US goods.

As a result, China imported 127,000 b/d, or around 46.36 million barrels, of US crude in 2019, down 48.3% from 2018, according to General Administration of Customs data. South Korea imported 137.89 million barrels of US crude last year, data from state-run Korea National Oil Corp. showed.

Beijing's latest conciliatory stance could, however, boost both state-run and independent refiners' appetite for light sweet US grades including WTI Midland and Eagle Ford, as well as medium sour Mars Blend, LOOP sour and Southern Green Canyon crudes, industry and refinery sources said.

"With geopolitical uncertainties keeping Middle Eastern crude supply at constant risk, medium sour US grades would start attracting Chinese buyers, especially independent refineries that primarily run on medium and heavier grades," a feedstock trading manager at state-run, Beijing-based Chinaoil said.

Still, some local traders argued that the US-China arbitrage economics might not be attractive enough to significantly boost US crude purchases in the near-term.

"The remaining 2.5% tariff is still too high to actively encourage importing US crude oil, as generally, the trading margin is less than 1%," a Shanghai-based trader said.

LOW REFINERY RUN RATES

Any immediate boost in US crude imports could also be difficult as the refiners slashed run rates and throughput levels amid faltering domestic fuel consumption in the wake of the coronavirus outbreak, market participants and analysts said.

Initial estimates showed that Chinese crude runs could be about 1 million-2 million b/d lower for February than originally expected, according to a Platts Analytics report.

State-run refiner Sinopec recently slashed overall crude throughput by about 13%, and its refineries across China is currently operating at minimum run rates in February, industry and company sources with close knowledge of the matter told Platts this week.

Independent refiners in Shandong province have also reduced their average run rate by more than 17 percentage points from mid-January, refinery sources and local traders with direct knowledge of the matter said.

The epidemic could also challenge Beijing in meeting its US energy purchases under the first phase trade deal with Washington.

"[One thing it depends on is,] what will the Chinese be in the mood for buying from the US. How long the virus is around and harming the economy," Sarah Ladislaw, senior vice president and director of energy and national security program at the Center for Strategic & International Studies, said in an industry panel discussion in Tokyo on Wednesday.

The coronavirus outbreak has significantly dampened China's economy and energy demand, and coupled with falling energy prices, it will be difficult for China to raise crude buying immediately.

Goldman Sachs last week cut its first-quarter real GDP growth forecast for China to 4.0% from 5.6%.

"Even with the assumption of a relatively quick rebound in Q2 and Q3, this would lower full-year 2020 growth to 5.5%, from 5.9% previously. A more prolonged outbreak could lower full-year growth to 5% or even below," the bank added.