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China's trading houses import bitumen blend despite high taxes amid crude quota squeeze

Highlights

First cargoes to attract consumption tax was Venezuelan Merey

Low bitumen blend prices in May attract risk-takers

H2 crude import quota availability 26% lower than H1

China's independent refineries are increasingly stepping back from importing crude oil due to a severe shortage of import quotas, encouraging trading houses to bring in feedstocks that fall under the category of bitumen blend despite a new consumption tax on the product.

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The first feedstock cargo to be subject to the Yuan 1,218/mt consumption tax, imposed from June 12 onward, arrived at Yantai Port in Shandong province late in the week ended July 10. A Shanghai-based trading company took the 140,000 mt cargo, according a source having knowledge about the matter, adding that the cargo was looking for a buyer.

Bitumen blend typically refers to crude cargoes blended off Malaysian waters with heavy crude grades, mostly Venezuelan Merey in recent years, while Iranian crudes have also come into the stream in 2021.

The cargo arrived in Yantai on the Marshall Islands-flagged 159,221 dwt Folegandros, which departed Sunga Linggi in Malaysia June 10, according to cFlow, S&P Global Platts trade-flow software.

Data from analytics provider Kpler showed the cargo was Merey crude diverted from another ship Njord, and originally departed from Jose in Venezuela on March 6.

The Shanghai-based trading house has paid more than Yuan 250 million ($38.62 million) in import, consumption and value-added taxes for the cargo, according to sources close to the deal.

On top of the existing 8% import tax, the consumption tax imposed June 12 adds Yuan 1,376.34/mt ($212.59/mt) to the cost of bitumen blend imports after VAT from June 12.

"Only around Yuan 800/mt of the consumption tax paid when importing bitumen blend can be passed to oil product buyers," said a Shandong-based industry source. The tax squeezes refiners' cash flow until they sell the oil product barrels, which is typically two weeks later.

In comparison, crude oil is free from import and consumption taxes, and consumption tax on oil products are only payable when selling products.

The bitumen blend price fell to as low ICE Brent minus $5/b after mid-May, when Beijing announced the new tax, attracting risk-takers to grab cheap cargoes then for July forward delivery. The price has already recovered to as high as ICE Brent plus $1/b recently, market sources said.

Two more bitumen blend cargoes totaling 271,000 mt blended from Venezuelan crudes are expected to be discharged in Shandong's Qingdao and Rizhao by trading companies in July to look for homes, respectively.

Tight quota

"Independent refineries will be short of crude import quota, so they will have to take some bitumen blend and pay the consumption tax," a trading source said.

According to Platts data, 36 of these independent refineries would have only 70.42 million mt of quota available for the second half of 2021 if they are able to fully gain their quotas, falling 26% from the 94.97 million mt of their total imports of crude and bitumen blend in the first half.

At the same time, the price of crude import quota in the black market -- an indicator of quota shortage -- hit a record high of Yuan 380-390/mt from the normal levels of below Yuan 300/mt.

"Very few quota holders are willing to sell their quotas as it has been very risky this year as the governments, central and provincial, imposed strict investigations and pose to punish quota trades," a Shandong-based refiner said.

Quota trading is illegal in China.

Meanwhile, supplies of bitumen blend are more sufficient than straight-run fuel oil, which is subject to the same consumption tax rate at Yuan 1,218/mt, market sources added.