China's new fuel tax rules raise concern for domestic LPG market
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.
Article continues below...
|Request a free trial of: Asian Petrochemicalscan|
Asian Petrochemicalscan provides weekly market updates, commentary and assessments ranging from naphtha feedstocks to aromatics, olefins, and polymers in Southeast Asia, Korea, Taiwan and Japan.
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
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
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
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
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
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
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, email@example.com
--Ramthan Hussain, Ramthan_hussain@platts.com
--Edited by Haripriya Banerjee, firstname.lastname@example.org