What is the impact of import consumption tax on the domestic oil market?

Recently, the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation explicitly issued a notice to levy consumption tax on some oil products. Starting from June 12, 2021, some refined oil products will be treated as naphtha or fuel oil, the notice said. What are diluted bitumen, mixed aromatics and light recycled oils? What is the impact of the levy of consumption tax on the supply and demand of oil products in China? What is the expected impact of supply and demand on domestic asphalt and high-and low-sulfur fuel oil futures?

Diluted asphalt, Import tariff No. 27150000 (asphalt mixture with natural asphalt as the basic composition) is an asphalt mixture with natural asphalt, petroleum asphalt, mineral tar or mineral tar pitch as the basic composition. Diluted asphalt is used not only as refinery raw materials, but even as marine oil blending raw materials, the scope of application is more and more extensive.

Mixed aromatics, import tariff no. 27075000 (distilling aromatics ≥ 65% of other aromatics mixtures at 250C), is one of the main feedstocks of chemical blended gasoline. Due to the fact that mixed aromatic hydrocarbons are imported without consumption tax, in recent years, some operators have imported a large number of gasoline components to produce blended gasoline in the name of mixed aromatic hydrocarbons.

Light recycled oil, Import tariff No. 27079990 (other products mainly composed of aromatic hydrocarbons from distilled coal tar, etc.), is an intermediate circulating material in the production of crude oil, which can be used to blend diesel oil or directly use as marine fuel.

The import declaration of diluted asphalt, mixed aromatic hydrocarbons and light recycled oil is classified as non-taxable products, and China and ASEAN countries have signed a free trade agreement, implementing zero import tariffs. Importers obtained certificates of origin by reconciling diluted asphalt, mixed aromatics and light recycled oil in ASEAN countries without paying tariffs.

According to the standard of 1.20 yuan per liter for diluted asphalt and 1.52 yuan per liter for mixed aromatics and light recycled oil, after June 12, 2021, the import excise tax on diluted asphalt, mixed aromatics and light recycled oil is 1276.21 yuan / ton, 1757.23 yuan / ton and 1707.87 yuan / ton, respectively.

After levying consumption tax, the three costs will be increased by more than 1000 yuan per ton, but we need to know the specific impact on varieties only by knowing the proportion of diluted asphalt imports to asphalt, mixed aromatics imports to gasoline, and light circulating oil to diesel.

In 2020, domestic imports of diluted asphalt, mixed aromatics and light recycled oil have greatly increased. We believe that there are many reasons: first, refineries use the advantage of floor price to purchase a large amount of crude oil below 40 US dollars per barrel of international crude oil, and crude oil import quotas are consumed massively. Diluted asphalt imports do not need quotas, which can be favored by georefining as raw materials for simple refineries (similar to the situation before the refineries were granted quotas in 2015). Second, the United States imposed sanctions on Venezuela, domestic asphalt raw materials are tight, and Venezuelan crude oil is re-exported to China by blending into diluted asphalt in Malaysia.

We can discuss the impact of the consumption tax on the three separately. First, the import quantity of diluted asphalt, light circulating oil and mixed aromatics is closely related to oil prices. Second, the import of oil regulating components (light circulating oil and mixed aromatics) exists at the same time as the export of finished products, and there is a negative correlation between the import of light circulating oil and the export of diesel, and between the import of mixed aromatic hydrocarbons and the export of gasoline. In particular, the import of light circulating oil is close to the export of diesel oil, combined with the background of excess supply and demand of gasoline and diesel oil in China in recent years, and the apparent consumption continues to decline. The import of mixed aromatic hydrocarbons and light circulating oil is not a shortage of domestic gasoline and diesel oil supply, but a behavior in which domestic traders make use of light circulating oil and mixed aromatic hydrocarbons without consumption tax at a specific time (a decline in gasoline and diesel exports). Non-standard gasoline and diesel blended with mixed aromatic hydrocarbons and light cycle oil have hidden safety dangers. For example, the sulfur content of diesel oil blended with imported light cycle oil may only be equal to the original level of country III and IV, which is very harmful to the environment. Most oil products can easily meet the standards of environmental protection and quality departments by means of blending, but it is a common phenomenon that some indicators outside the scope of the standard are worse than those of the main refinery products. It will bring certain environmental impact and safety risks.

Once a consumption tax is levied on light recycled oil and mixed aromatics, the oil regulation window is closed, the import of domestic light circulating oil and mixed aromatic hydrocarbons is expected to be greatly reduced, and the reduction of non-standard gasoline and diesel resources is conducive to alleviating the situation of excess domestic gasoline and diesel supply. once there is a supply shortage, it can also be achieved by reducing the export of gasoline and diesel (the import of light circulating oil and mixed aromatic hydrocarbons is less than that of diesel and gasoline). However, the decrease in the import of light recycled oil and mixed aromatic hydrocarbons is equivalent to reducing China's demand for refined oil products from East or Southeast Asian countries, and suppressing the price difference between refined oil products in Singapore. Once the surplus of refined oil in China is not alleviated, still maintain a relatively high export of refined oil products, then the price gap of refined oil cracking in Singapore is expected to decline further.

From a technological point of view, Singapore marine low-sulfur fuel (up to 0.5% sulfur content) is mostly distillate blending, which is close to the index of light circulating oil and much higher than 10ppm diesel, so we have seen the recent Singapore low-sulfur fuel monthly difference, cracking price difference continued to decline, or a negative effect on the news.

According to Bloomberg data, Venezuelan crude oil exports are mainly concentrated in China after October 2020. China imports an average of 1.78 million tons of diluted asphalt a month from January to March 2021, and most of China's diluted asphalt imports come from Malaysia. it may imply that Venezuelan crude oil is exported to China in the form of diluted asphalt after blending in Malaysia to become the raw material for geo-refining asphalt refineries. At present, the geo-refinery is the first domestic asphalt production group, with a national asphalt output of 32.89 million tons in 2020, of which georefining output is 14.91 million tons, accounting for 45%. The high proportion of georefining asphalt production will continue in 2021. In 2020, 15.96 million tons of domestic diluted asphalt was imported, assuming that all the imported diluted asphalt was used to produce asphalt. According to the 60% asphalt rate, the corresponding asphalt output was 9.57 million tons, and the proportion of refining asphalt production was 64%, accounting for 29% of the national asphalt production. This means that diluted asphalt has become the main raw material for domestic geo-refining asphalt, affecting nearly 30% of the national asphalt output.

In the short term, after June 12, 2021, the consumption tax on diluted asphalt will be levied, and the cost of asphalt will increase significantly. Refineries may have several solutions:

First, in view of the advantages of diluted asphalt to produce asphalt, as well as the shortage of other heavy raw materials, the high consumption tax will be transferred to asphalt, and the price gap of asphalt cracking will face a long-term upward pressure. The implementation of June 12, 2021 may stimulate short-term diluted asphalt import demand for asphalt raw material supply or surge, superimposed tax is expected to increase the long-term cost, bad asphalt monthly difference.

Second, when refineries choose to switch raw materials and purchase Middle East and Canadian crude oil, the unstable supply of raw materials, the unstable production of switching raw materials and the decline of asphalt rate of raw materials will lead to the decline of asphalt supply. the price difference of asphalt cracking is facing medium-and long-term upward pressure. Excess diluted asphalt to reconcile high-sulfur 380380 blend raw material supply surged, pulling up Yuanyue asphalt-high-sulfur fuel oil price difference.

Third, traders reconcile the diluted asphalt index to the crude oil index and declare it in the form of crude oil, but the reconciliation needs to be tested, and the asphalt cracking price difference is facing short-term upward pressure. in addition, the import demand for crude oil will be increased through the customs declaration of crude oil. consumption of crude oil import quotas to support crude oil demand.

From a longer-term point of view, the imposition of import consumption tax on diluted asphalt, mixed aromatics and light recycled oil is conducive to standardizing the domestic oil market and reducing the impact of non-standard gasoline and diesel resources on the market. crack down on tax evasion and put an end to the negative impact of non-standard gasoline and diesel on the environment and safety. The reduction of non-standard resources will help to return profits to large-scale refineries with quotas. Refineries without quotas will face increased costs or high quota procurement costs, and profits will further decline. This policy may realize the integration of refinery capacity through profit compression, the oil products market will be more standardized, and the conditions for the listing of oil products futures will be gradually improved.