According to a Platts report, Beijing is believed to have approved a long-awaited tax rebate on fuel oil, paving the way for domestic refiners to supply bunker fuel to ships plying the international route, several sources with knowledge of the matter said late Thursday.
What is it?
“The State Council approved the tax rebate policy for fuel oil exports under the general trade route on January 8. This is expected to be released [soon] by the Ministry of Finance,” one source said. But the rebate will only apply to sale of fuel oil to bonded storage, and not for cargo exports, another source said.
Discouraging Low-Value Fuel Oil
In an effort to discourage refiners from producing low-value fuel oil, the product was slapped with a Yuan 1,218/mt ($173.4/mt) consumption tax and a 13% value added tax, and no rebates were given even for supply to bonded storage for sale to ships plying international routes.
In contrast, refiners can claim tax rebates on exports of gasoline, gasoil and jet fuel with a similar taxes rebate policy announced in end-2016.
The implementation of IMO 2020, which caps the sulfur content on all marine fuels at 0.5%, effective January 1, has dramatically altered the fate of what was once considered a low-value fuel and Chinese refiners have been scrambling for the government to give rebates on sales of very low sulfur fuel oil to bonded storage.
Chinese refiners have capacity to produce 18.5 million mt/year of VLSFO, but have not been able to compete in the international market due to the tax.
Almost all fuel oil supplied to ships docking at Chinese ports is typically imported, and this trade flow could see some alterations once domestic refiners are able to supply to the bonded facilities.
China’s bonded bunker fuel consumption is about 12 million mt/year, according to bunkering sources.
LACK OF CLARITY ON FUEL OIL EXPORT QUOTAS
It remains unclear if the Ministry of Commerce will award a separate quota for fuel oil exports under the general trade route or will allow refiners to export the product under the overall product export quota of 24.56 million mt awarded end-December to five state-owned oil companies.
“If there is no separate allocation for fuel oil, technically, the quota holders should be able to export [the product] once the tax rebate is announced,” the first source said, adding that some time may be needed to manage logistics and for coordination with the local tax and custom authorities.
In a break from the norm, the latest quota allocation for 2020 did not give a breakdown of export quota by product under the general trade route, giving companies the flexibility to adjust their export plans to suit market conditions.
The five quota holders are CNPC, Sinopec, CNOOC, Sinochem and China National Aviation Fuel. CNAF is unlikely to get a quota to export fuel oil as MOFCOM stated in its a document that all its quotas are for jet fuel.
Export quotas are allocated under two routes — the general trade route and the processing trade route. The general trade route offers exporters more flexibility than the processing trade route, which comes with conditions such as the exporting product must be produced from imported crude oil and must be from a refinery that has been awarded an export quota. But products exported under processing trade route are naturally tax-free.
China allotted an export quota of 3.44 million mt, 95.64% of which is jet fuel, under the processing trade route for 2020.
REFINERS’ VLSFO PRODUCTION PLANS
The tax rebate is expected to encourage refiners to tweak their products yield to produce more fuel oil.
China’s gasoil production yield stood at 25.5% while fuel oil was 3.7% over January-November 2019, according to data from National Bureau of Statistics.
State-owned refiners are already started planning VLSFO production in January as price for the fuel has soared due to supply tightness.
The benchmark FOB Singapore Marine Fuel 0.5% was assessed at $620.58/mt on Thursday, $23.09/mt higher than FOB Singapore 10ppm gasoil which was at $597.49/mt on the same day, S&P Global Platts’ data showed.
“Sinopec’s Shanghai Petrochemical plans to product 20,000 mt VLSFO in the month, stable from December, and a state-owned refiner in southeastern China also plans to produce its first barrel of VLSFO in January, at about 3,000 mt”, market sources said.
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