ANALYSIS: New China tax on MTBE, aromatics to raise blended gasoline costs
Singapore (Platts)--4Dec2012/421 am EST/921 GMT
The Chinese government's latest move to combat tax evasion by imposing a
consumption tax on MTBE and aromatics is likely to raise gasoline blending
costs and make imports of finished gasoline relatively more cost-effective,
industry sources said this week.
China's State Administration of Taxation in mid-November announced a
series of measures to take effect January 1, 2013, which include levying
consumption tax on certain petroleum products that were previously exempted
as well as requiring inspection certificates for those claiming exemption.
Specifically, the tax authority's notice of November 15 for the first
time puts MTBE and aromatics in the list of products liable for consumption
tax. The tax will be the same as the current rate on naphtha, which is Yuan
1,385/mt ($220/mt), or Yuan 1/liter.
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MTBE and aromatics, commonly blended into gasoline to raise its octane
level, are currently not subject to consumption tax. China exempts naphtha
derivatives from consumption tax as a measure designed to encourage the
petrochemicals industry and allow producers to recoup the consumption tax
levied on naphtha.
Under the new rules, the exemption is being withdrawn for MTBE and
aromatics sold for gasoline blending. Products obtained from naphtha that go
into petrochemicals manufacturing will continue to enjoy exemption from
China's consumption tax is imposed on entities and individuals engaged
in the production, processing or importing of taxable consumer goods.
BLENDED GASOLINE LESS ECONOMIC
Gasoline blenders in China usually buy MTBE and aromatics to blend with
off-spec gasoline and naphtha, in order to raise its octane number.
"With MTBE and aromatics being taxed according to the new rules, the
cost of blending gasoline will increase by about Yuan 648/mt," said a trader.
That calculation is based on a typical ratio of 0.4 mt of MTBE and aromatics
used to produce 1 mt of gasoline.
The Yuan 1,385/mt consumption tax, once added to the value of the
blended gasoline, would also lead to a corresponding Yuan 235/mt rise in the
value-added tax or VAT payable on it, which is levied at a rate of 17% of the
product value. That implies a total Yuan 648/mt in incremental cost in the
production of blended gasoline.
The bulk of gasoline supplied in China's domestic market--85-90%--is the
finished product from state-owned refiners. About 10-15% of the supply comes
from blenders and "teapot" refiners, sources said.
The teapot refineries, which are small-scale plants with little or no
secondary processing capacity, typically process imported crudes and fuel oil
to produce mostly gasoil and gasoline for sale in the domestic market. But
due to their limited processing ability and poor quality feedstock, the
gasoline produced needs to be blended with MTBE or aromatics in order to meet
the national fuel standards.
The additional Yuan 648/mt tax incurred in the production of blended
gasoline would put it on a par with or even higher than the cost of standard
gasoline produced by the state refiners, the consumption tax on which remains
unchanged at Yuan 1,388/mt, sources said.
On November 30, the price of National III standard 93 RON gasoline was
around Yuan 9,000-9,100/mt, while the blended gasoline of the same standard
fetched Yuan 8,400-8,500/mt, translating to a spread of Yuan 600/mt.
"If blended gasoline no longer has a price advantage compared with the
barrels produced by the state-owned refineries, private gas stations may
prefer to buy the better quality product from the state-owned refineries,"
said a trader of blended gasoline in Guangdong. "Eventually, demand for
blended gasoline will be squeezed," he added.
Private-owned gas stations, which account for 25-30% of China's state
sector-dominated retail network, are major buyers of blended gasoline.
Sinopec and PetroChina's gas stations sell gasoline allocated from the group
The higher cost of blended gasoline will narrow the margins of the
private gas stations and also raise gasoline retail prices, sources said.
OIL MAJORS MAY RAMP UP PRODUCTION OR CUT EXPORTS
If blended gasoline volumes in the domestic market shrink, the
state-owned majors will have to plug the supply gap by stepping up production
or cutting back exports.
"The production of blended gasoline is expected to grow by 5% roughly
from 2011 to above 10 million mt this year, which accounts for about 10-15%
of the total gasoline supply," said an analyst from Beijing-based energy
information provider JYD Commodities Hub.
There could be a big gap in the country's gasoline supply if blended
gasoline availability declines while demand continues to rise, sources said.
Chinese consumption of gasoline over the January-October period this
year rose 11.3% from the first 10 months of 2011 to 70.9 million mt,
according to Platts calculations based on official data released by the
Investment bank JP Morgan in August estimated Chinese gasoline demand
could rise by about 12% in 2013.
Among the measures to increase supply, "the state-owned refineries could
raise the yield ratio of gasoline... There are also new refineries coming on
stream," the analyst added.
China could see more than 1 million b/d of new refining capacity coming
online this year and in 2013, which could also help boost gasoline
"Besides increasing output, China could also export less gasoline in
order to meet the domestic demand," said the analyst.
Statistics from China's customs department show the country exported
2.34 million mt of gasoline in the first ten months of this year. China is a
net exporter of gasoline.
IMPORTS MAY LOOK GOOD
Meanwhile, costlier domestically blended gasoline would also likely
narrow the price spread with Singapore-origin gasoline, opening up more
import arbitrage opportunities, sources said.
The cost of Singapore-origin 92 RON gasoline imported into southern
China's Huangpu port was estimated at around Yuan 9,100/mt inclusive of all
taxes, based on Platts assessments November 30, while the spot price of
domestically produced National III standard 93 RON gasoline with similar
specifications was around Yuan 9,000-9,100/mt in Huangpu.
"There is no price gap between Singapore [prices] and domestic barrels
currently. So we believe there will be more interest in importing gasoline
when the blending costs rise next year," said a Guangdong-based gasoline
Only state-owned companies such as Sinopec, PetroChina, CNOOC and
SinoChem have the right to import gasoline into China.
"Private companies could turn to those state-owned companies and ask
them to import gasoline on their behalf," the blender added.
Chinese imports of gasoline registered a big jump this year. The country
imported 4,509 mt of gasoline during the January-October period, compared
with just 141 mt over the same period a year ago, the latest statistics from
China customs showed.
--Edited by Vandana Hari, email@example.com