China’s independent oil refineries, known as ‘teapots,’ have halted operations due to a new fuel tax policy that has significantly increased their feedstock costs.
Several independent oil refineries in eastern China have temporarily halted operations due to the impact of new Chinese tariff and tax policies.
These plants, known as ‘teapots,’ are struggling to remain competitive amidst an earlier-than-expected peak in fuel demand and Beijing‘s efforts to eliminate inefficiency.
The introduction of a new consumption tax policy has significantly increased feedstock costs for these refineries.
Under the previous system, refiners received rebates at 100% of the ‘1,218 yuan ($167.18) per metric ton consumption tax paid for feedstock imports’.
However, the new policy offers rebates at only 50%-80%, effectively raising feedstock costs by $33-$83 per ton.
A fuel levy, also known as a fuel tax or gasoline tax, is a type of excise tax imposed on the sale of fuels such as gasoline and diesel.
The revenue generated from fuel levies is typically used to fund various public expenditures, including transportation infrastructure development, road maintenance, and environmental protection programs.
In many countries, the fuel levy rate varies depending on the location and the type of vehicle being fueled.
For instance, some regions impose a higher tax on diesel compared to gasoline due to its perceived negative impact on air quality.
This increase in costs has led to losses of 300 to 600 yuan per ton for these refineries.
As a result, several plants have halted operations or plan to do so for indefinite maintenance periods.
The stoppages are also affecting demand for straight-run fuel oil, causing premiums to decline.
Refinery losses refer to the difference between the actual output and the theoretical maximum output of a refinery.
These losses can occur due to various factors such as equipment failures, maintenance downtime, and process inefficiencies.
According to the US Energy Information Administration, refinery losses averaged around 5% in 2020.
This translates to approximately 500,000 barrels per day of lost production capacity.
Optimizing refinery operations and investing in new technologies can help minimize these losses and improve overall efficiency.
At least four independent refineries in Shandong province, including those operated by Shandong Shangneng Group, Kelida Petrochemical, Wonfull Petrochemical, and China Overseas Energy Technology (Shandong), have been affected.
These plants process straight-run fuel oil or bitumen blend into transportation fuels or asphalt.
The new tax regime has made it challenging for these refineries to sustain production.
One manager stated that ‘it’s very hard for plants to sustain production’ under the new policy.
The other plants operated at about 50% capacity on average before the policy changes, one industry source estimated.
The China refining industry is a significant contributor to the country's energy sector.
As of 2022, China has a total refining capacity of approximately 14.4 million barrels per day (mb/d), making it the world's largest refiner.
The majority of China's refineries are located in coastal provinces such as 'Shandong, Jiangsu, and Guangdong'.
The industry is driven by demand for gasoline, diesel, and jet fuel, with a growing focus on petrochemical production.
Key players include Sinopec, PetroChina, and CNOOC.
The stoppages are dampening demand for straight-run fuel oil, leading to lower premiums of Russia’s straight-run fuel oil blend M100.
However, prices for bitumen blend have remained relatively stable due to enquires from plants with crude quota and concerns over increasingly costly Iranian or Russian oil due to tighter U.S. sanctions.
The consolidation in China’s refining industry is expected to continue as the government drives out inefficiency.
The impact of this policy change will be closely monitored by market analysts and traders.
