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China's new oil tax reporting regime dents mixed xylene demand: sources

Singapore — China's partial rollout of a more stringent tax reporting regime for oil products in March has lowered demand for petrochemical gasoline blendstocks such as isomer-grade mixed xylene and solvent-grade mixed xylene, market sources in China said this week.

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So far, prices of domestically offered isomer-MX in East China have already fallen to Yuan 5,500-5,520/mt, or about $716/mt on an import parity basis by March 8, from around Yuan 5,870-5,880/mt, or $770/mt on an import parity basis, on February 8.

At the same time, the FOB Korea marker has fallen to $762/mt FOB Korea on March 7, down 4.9% from a two-and-a-half year high of $801/mt on February 27, S&P Global Platts data showed.

Parts of the new tax monitoring module was delayed to May 1, but China did implement the oil products reporting system from March 1.

The new system is designed to close loopholes which have until now allowed independent refiners and blenders to avoid paying a consumption tax by passing off one product for another, Platts reported previously.

The new tax regime means that any products used for gasoline blending would in theory be subject to a consumption tax, and that would include petrochemical products such as isomer-MX and solvent-MX, market sources said.

A trader said the consumption tax for MX used in gasoline blending would amount to about Yuan 2,000/mt ($316.10/mt) as part of the overall gasoline amount.

However, as long as isomer-MX and solvent-MX are used in the production of chemicals such as paraxylene or solvents, their use would not be subjected to the consumption tax, sources explained.

"China's MX demand especially from [the gasoline] blending market has shrunk," a Northeast Asian trader said this week, adding that "everybody is still checking how big is the impact ... But it is obvious all blending component demand should be decreased."

"Imports are bound to decrease," a Chinese MX-trader said, adding that he expects gasoline blending demand for isomer-MX to remain subdued in the future.

Separately, a Japanese MX producer said "we need to see [the] actual impact of the change after the tax change is implemented. I think it is too early to say demand increased or decreased."

Typically, China's spot purchasing of isomer-MX has been driven by gasoline blending demand and prices of various blendstocks such as mixed aromatics.

Market sources have previously said that a possible implication of the tighter tax rules could be increased run rates among MX producers in China, who would channel more of their MX production straight to the gasoline pool.

This could potentially lead to increased MX imports by PX producers in China, who are expected to be expanding their production capacities on a large scale over the next five years.

--Gustav Holmvik,
--Edited by Irene Tang,