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China's Apr light cycle oil imports hit record high 2 mil mt ahead of new tax

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China's Apr light cycle oil imports hit record high 2 mil mt ahead of new tax

Highlights

Imports to fall after new consumption tax kicks in June 12

Unlikely to find replacement blendstock soon: importer

Domestic stocks expected to sell down slowly

Singapore — China's light cycle oil imports jumped 48.1% year on year to a record high of more than 2 million mt in April as importers of the gasoil blendstock scrambled to bring in as many barrels as possible before the introduction of a consumption tax.

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Imports are expected to stay high in May before dropping off in June after the government announced on May 14 the new consumption tax would take effect June 12.

"This is the final wave," an LCO importer in Guangzhou said.

The country imported 2.08 million mt of LCO in April, with South Korea supplying 1.28 million mt, General Administration of Customs data showed May 20.

April's inflows were 12.7% higher than the previous record high of 1.84 million mt in December 2020, when there was speculation in the market that the tax would come be imposed the following month.

When S&P Global Platts first started tracking the data on imports in May 2016, just 289,000 mt was imported.

Expectations that a consumption tax or other ways to dampen imports of LCO could be introduced have risen at various times since inflows started becoming more popular around 2016, with import volumes surging each time.

With 1,000-1,200 ppm sulfur content, LCO is a common blendstock for gasoil and is used in the mining, construction, fishing, industry and agricultural sectors. A metric ton of domestic kerosene blended with imported LCO can yield 2-2.5 mt of gasoil.

Imports are currently free from consumption tax, while it is easy to avoid paying the tax for LCO-blended gasoil. In comparison, gasoil produced from refineries, or directly imported, attracts a Yuan 1,411/mt ($29.41/b) tax.

However, from June 12 onward, imported LCO will be subject to a Yuan 1,800/mt ($37.52/b) consumption tax as the government seeks to make the tax regime fairer and encourage the use of more environmentally friendly fuels, the Ministry of Finance said in a statement.

Prices rise

"Unlikely to find a competitive replacement [for importing and blending] in the short term; it took about five years for the LCO market to become mature with stable buyers, suppliers and infrastructure," said the Guangzhou-based importer, who was one of the first LCO importers in China.

LCO cargo offers from South Korean refiner GS Caltex rose to a premium of $7-$8/b to the Mean of Platts Singapore gasoil assessment May 20 on a CIF China-basis for delivery by the tax deadline, from a premium of $6/b on May 14 before Beijing's tax announcement, according to importers.

"Price is reasonable but it is difficult to open an LC [letter of credit], too risky," a second importer said.

The LCO price in the domestic market jumped 18% to Yuan 5,150/mt ($107.33/b) May 19 from around Yuan 4,500/mt on May 14, market sources said.

"LCO inventory is above 1 million mt in China, not a low level in usual days, but we would prefer to sell slowly," a trader in eastern Jiangsu province said.

End-users are expected to turn to domestically produced gasoil, especially those that can be renamed to products that attract lower tax rates, market sources said.

China's top light cycle oil suppliers:

(Unit '000 mt)

Apr-21
Mar-21
change
Apr-20
change
South Korea
1,283
1,012
27%
759
69%
Indonesia
468
280
67%
93
404%
Malaysia
195
183
6%
394
-51%
Singapore
53
30
74%
75
-30%
Brunei
23
12
93%
0
Total
2,076
1,562
33%
1,401
48%
Source: China General Administration of Customs