Asia’s Petroleum Trade Gets Turbulent Following China’s Tax Policy Changes

June 2021 witnessed China’s unprecedented move to introduce consumption tax impacting the imports of light cycle oil and mixed aromatics which have significantly diminished their imports into the country in the third quarter of 2021, prompting the country to covet higher crude oil imports to support greater domestic output. The imposed consumption tax, which amounts to USD 0.2363 per litre of light cycle oil and mixed aromatics, has escalated the costs of these materials supplied by South Korea and other international traders.

In July, China imported 20,000 barrels/day of light cycle oil which was lower than its average import volume of 390,000 barrels/day in the first two quarters of the year. August also witnessed low volumes of imports rounded to 30,000 barrels/day, which was just above the July volumes but considerably lower than China’s traded volumes before implementation of the levies. Likewise, the import of mixed aromatics stood at 70,000 and 30,000 barrels/day in July and August, respectively, showing a substantial decline from the average import volume of 170,000 barrels/day in the first two quarters.

Light cycle oil is produced as a residual liquid from the fluid catalytic cracking of heavy hydrocarbon fractions that result from the preliminary refining stages of crude oil. It is used as a blending component in diesel. On the other hand, mixed aromatics, typically consisting of benzene, toluene, and xylene, are base components that are blended into gasoline to enhance its octane number.

The use of these materials as blending components amid limited imports seem quite uneconomical, however, rebates on the tax could be availed for their application in the petrochemical sector. The impact of the imposed consumption tax was also observed on China’s petrochemical export trends that demonstrated a swingeing fall in the third quarter as the refiners are tending to save the inventories amid tight imports.

As per ChemAnalyst, the changing tax policies, trade and production patterns in China are anticipated to have a massive impact on Asia’s crude oil and aromatics market. Under the new tax policy, China is propelled to indulge in higher domestic production of light cycle oil and mixed aromatics thereby creating a firm demand for upstream crude oil. With China’s driving inclination towards greater crude oil imports, the other countries may have to battle with limited supplies and surging crude oil prices. Furthermore, the aromatics sector in Asia will also be facing volatility in the prices of aromatics such as benzene, toluene and xylene.