China’s independent refiners are likely to reduce fuel oil imports further in 2025, after a drop of 8% last year from a record high in 2023, due to rising tax costs, trade and refinery sources said on Jan. 8.
Independent refineries that do not qualify for crude oil import quotas will struggle due to increased import tariffs and reduced fuel oil consumption tax deductions, the sources added.
Fuel oil is an important alternative raw material for small independent refineries in Shandong, also known as “teapots”, especially for refineries that are prohibited from processing imported crude oil.
Their annual imports fell 8% year-on-year to 12.28 million mt in 2024. Fuel oil accounted for about 6.3% of their feedstock portfolio in 2024, largely unchanged compared to 2023.
This year-on-year decline follows a decline that occurred since October when the government said it would tighten the application of consumption tax regulations on barrels.
In December, fuel oil imports by independent refiners fell 29.3% month-on-month to 410,000 mt, dropping by more than half from 1.02 million mt in September, according to S&P Global Commodity Insights data.
Tax burden increases
Imports fell despite uncertainty regarding the tax implementation schedule, so there was no clarification from the State Tax Agency on 19 December.
The clarification states that refining companies can only offset the consumption tax imposed, equivalent to the actual output of the taxable product, and must bear the remaining tax burden.
The move will increase the tax burden by at least 400-500 Yuan/mt ($54.59-$68.24/mt) on barrels when taking into account petrol, petroleum as the main taxable products, according to refinery sources.
Several sources in Binzhou city, Shandong province, said they would only deduct 80% of fuel oil consumption tax as directed by the local government based on their gasoline and gas oil output. In comparison, their current reduction is 100%.
Additionally, China has raised tariffs on fuel oil imports to 3% from the current 1%, effective January 1.
Refining sources said higher tariffs would result in cost increases of 60-100 Yuan/mt ($7.89-$13.70/mt), further dampening import appetite.
outlook for 2025
As fuel oil procurement costs are expected to increase, some boilers, which are prohibited from processing imported crude oil, face significant limitations in their choice of raw materials.
“We have few alternatives and will likely continue using fuel oil for some time,” said a source from an independent refinery.
With no access to imported crude oil, coupled with weakening demand for oil products and rising raw material prices, these refineries are expected to face increasingly difficult operational conditions in 2025.
In comparison, independent refiners who have crude oil import quotas will be in an advantageous position, potentially allowing them to import fuel oil despite expected increases in costs.
Market activity also showed limited offers for Russian M100, a type of fuel oil popular among Chinese independent refiners. Recent estimates suggest that the offer level for this grade is around $65-$70/mt versus Singapore’s 380 CST HSFO Mean of Platts grading, while Iran’s 280 CST fuel oil is being offered at a premium of around $20/mt on the same basis.
Average refining margins for processing imported crude by independent Shandong refineries fell to about Yuan 292/mt ($5.5/b) in 2024 from Yuan 813/mt ($15.2/b) in 2023, data from OilChem show.
Sinopec estimates the independent sector will experience a reduction in refining capacity of 6 million-10 million mt/year by 2025 due to narrowing margins and increasingly fierce competition.
Source: Platts
