Singapore (Platts)--27Nov2012/442 am EST/942 GMT

China's domestic LPG market could be at risk because of the use of LPG in producing mixed aromatics, even though the hydrocarbon is not directly named under the new fuel consumption tax rules which will become effective from January 1, traders said Tuesday.

The effect the new rules will have on LPG imports, however, was still unclear, while analysts said the impact could be minimal.

The State Administration of Taxation announced earlier this month that it will tighten fuel consumption tax guidelines to clamp down on refineries, traders and other operators from evading tax by blending fuel and declaring them under other names.

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The tax office said the existing tax for listed oil products -- gasoline, diesel, naphtha, lubricants, jet/kerosene, solvents and fuel oil -- would remain but now added that the taxes would also apply to all oil products matching these products' specifications that are produced from crude oil.

The tax office said all other oil products that adhere to national oil and petrochemical industry standards and are issued product certificates by the government would not be taxed.

Anything that falls outside this criteria would be taxed according to the rate levied on naphtha, which is Yuan 1 (16 cents)/liter, it said.

LPG was not identified by the tax office and will be exempt from the consumption tax, but traders said under the new guidelines, mixed aromatics which have no national standards, will likely be taxed at the naphtha rate.

State company Sinopec estimates that more than 60% of LPG is used by households, just over 20% is used by industrial customers, while the rest is used by other segments.

But according to some traders in China, between 50% and 60% of LPG produced in the country could be used for making aromatics, which are then blended with gasoline. This proportion could be as high as 80% in North China.

"The key question is whether independent refiners will continue to make blended [aromatics], as they have to now pay tax," said Colin Shelley, LPG analyst at FACTS Global Energy. He estimated that most of the LPG produced in China was used for cooking, with only a small proportion used to produce petrochemical products.

But others disagree.

"There is no tax for LPG, but lots of domestic LPG is used for mixed aromatics and such industries may have to shut down or run at very low rates," a Western trader familiar with the China market said. "And more LPG would be pushed out to the domestic market," he said, referring to households. LPG SEEN TO BE VYING WITH NATURAL GAS FOR SHARE IN DOMESTIC MARKET

Market sources said this would mean that LPG would have to vie with natural gas, which is cheaper than LPG, for residential customers.

Natural gas is increasingly being used as a source for town gas supply as more inland provinces become urbanized.

A survey of the domestic LPG industry by the Economy Information Daily last year showed that natural gas consumption will continue to outgrow LPG, particularly with the commissioning of the PetroChina's Second West-East natural gas pipeline, as well as rapid development of urban pipeline networks.

The survey showed that China's natural gas consumption may double in five years, which would further crimp the LPG market.

Under the current Five-Year Plan, China's official target is for total natural gas demand to hit 230 Bcm/year (22.2 Bcf/day) by 2015, while supply capacity will exceed 260 Bcm.

Among China's 322 large and medium-sized cities, 210 are already using natural gas and in the next five years, 200 more cities will start to use it.

On the other hand, LPG demand is expected to fall by 0.5% annually over 2010-2020, with demand likely to reach 22.2 million mt by 2020, according to Sinopec.

Traders and importers worried about the impact the latest tax rules will have on the LPG market, are seeking greater clarity on its implications.

"For now it is not clear how the market will adjust to the new tax," said a Beijing based-trader. "Imports may not be affected as most of the aromatics are produced from domestic LPG," he added.

Shelley agreed: "I doubt [the new rule will affect LPG imports]. First all, imports are not very big and they usually occur when LPG prices are relatively cheap in the international market, so that practice will probably continue."

A trader with a regional LPG importer and distributor said: "We are talking to our people at the terminals in China. They will have to seek more information from the government, the market and other relevant parties such as refiners."

LPG imports into China over January-October were up 20% year on year to 14.85 million mt, while exports had gone up 7.5% year on year to 1.07 million mt, Chinese customs data showed.

Domestic LPG production over January-October, meanwhile, stayed largely flat, rising just 1.8% year on year to 18.47 million mt, data from the National Bureau of Statistics showed.

News of the new tax guidelines comes at a time when the Asian LPG market is reeling under high inventory levels in key consumers Japan and South Korea, which have limited their imports for winter, while traders are seen to be long on December supplies as well. Some trading firms and importers are also nearing the end of their fiscal year and are winding down operations, market sources said.

Prices of propane and butane for delivery along the Singapore-Japan route 30-45 days forward were assessed at $1,035/mt and $9753/mt, respectively Monday, down from recent highs of $1,148/mt and $1,078/mt assessed on September 12, Platts data showed.

The front month December Saudi Aramco propane Contract Price swaps fell to $1,010/mt Monday, from recent highs of $1,035/mt seen on November 19, lagging the Saudi November CP of $1,050/mt, Platts data showed.

--Song Yen Ling, yen_ling_song@platts.com --Ramthan Hussain, Ramthan_hussain@platts.com --Staff, newsdesk@platts.com --Edited by Haripriya Banerjee, haripriya_banerjee@platts.com

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