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China's consumption tax seen hurting bitumen blend imports in H2: sources

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China's consumption tax seen hurting bitumen blend imports in H2: sources

Highlights

Around 2.5 mil mt cargo to be discharged in May

Refiners may continue imports by re-allocating tax cost

Heavy crude to be in favor

China's bitumen blend imports -- which reached a four-month high of 2.41 million mt in April -- are likely to hover over 2 million mt in May before falling sharply from June onwards due to the imposition of consumption tax on heavy grade starting June 12, market sources told S&P Global Platts.

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Bitumen blend inflows jumped 34.5% on the month in April, rising more than four times from the year-ago level, with market sources attributing the gains to increasing Iranian crude supplies.

Bitumen blend is typically crude cargoes blended off Malaysia waters with heavy grades, mostly Venezuelan Merey in recent years, which are used as feedstock to produce asphalt for paving roads.

Independent refineries, especially those in Shandong province, are the major buyers of bitumen blend as the barrels are consumption tax free and refiners are not required to use crude import quota when bringing in the cargoes.

Improved refining margins in domestic market since late April lifted independent refineries' crude appetites and encouraged bitumen blend imports.

As a result, the inflows surged 524.1% on the year to 7.74 million mt in January-April due to the low base in the same period of last year, in addition to increased demand for the competitive Iranian crude oil.

In May, S&P Global Platts estimated around 2.5 million mt of bitumen blend waiting to be discharged at Shandong ports.

New tax to discourage imports

But the heavy inflows also attracted attention from the government, which announced on May 14 to impose Yuan 1,218 mt/mt, or around $190 mt/mt, of consumption tax, effective June 12, to discourage consumption of the fuel.

The tax rate equivalent to that has already been imposed on fuel oil, volumes of which dropped significantly despite some rebounds in recent years, when the independent refineries are short in crude import quota.

As a result, market participants expect bitumen blend imports to fall in H2 while independent refineries' crude imports will be further restricted by import quotas.

China imported 12.46 million mt of bitumen blend in H2 2020, data from General Administration of Customs showed.

End-users to bear cost

Despite the tax hurdle, refineries and analysts still see some room for the bitumen blend-like heavy crudes to flow into China when quota availability is in shortage.

"Independent refineries would rearrange their tax cost allocation among their feedstock slate, and partly pass the new tax cost to oil product end-users if they need to import those heavy crudes," a Beijing-based analyst said.

The consumption tax collected while importing bitumen blend or fuel oil will pass on to end-users when their refined oil products are sold, according to China's taxation policy.

"These heavy-crude barrel is more likely to be declared as fuel oil which has higher yield of refined products to pass through the tax cost," a Shandong-based source said.

Moreover, independent refiners would report higher petrochemical product yield from the crude imported via quota to offset consumption tax costs, the sources said. Petrochemical products are consumption tax free as China encourages their production.

Other alternatives

Moreover, independent refineries may look into other alternative feedstocks, including domestic crudes and imported heavy grades.

"Some offshore grades produced by CNOOC, as well as Liaohe crude, are also suitable for producing asphalt," said an analyst with JLC.

But those grades, which are mostly used by CNOOC and PetroChina's refineries, are of limited supply in the market, and seldom offered into the spot market.

On the other hand, independent refineries have also started to use Cold Lake, Basrah Heavy, Napo and others as feedstock to produce asphalt.

The only problem is that the supply of those crudes are limited in the market, said the analyst.

CHINA'S TOP BITUMEN BLEND SUPPLIERS ('000)

April-21
April-20
Change
March-21
Change
Malaysia
1,926
400
381.7%
1,631
18.1%
Togo
286
0
N/A
0
N/A
Singapore
194
131
48.7%
73
167.6%
Total*
2,409
532
352.9%
1,791
34.5%

Jan-April 2021
Jan-April 2020
% Change
Malaysia
6,363
679
837.7%
Singapore
714
560
27.4%
Angola
289
0
N/A
Total*
7,743
1,241
524.1%

Notes: *including exports to other countries

Source: General Administration of Customs