By Chen Qian, China Petroleum & Chemical Corporation Qilu Petrochemical

In order to promote the standardized and healthy development of the refined oil industry, the State Administration of Taxation issued the Notice on the Implementation of Some Refined Oil Excise Tax Policies (hereinafter referred to as the "Notice") on June 30, 2023, among which it made clear explanation on the implementation of some refined oil excise tax policies that comply with the Notes on the Scope of Excise Tax on Refined Oil Products.

The Notice includes 17 types of chemical products in the tax category of refined oil, which levies the same excise tax rates as refined oil. At the same time, these 17 types of products are divided into three categories, which are subject to excise tax in accordance with the sub-tax items of gasoline, solvent oil and naphtha respectively. The clarification of the excise tax on various oil products will have a certain impact on the tax-related products and related product markets.

The content of the Notice is as follows:

(1) The excise tax on alkylated oil (iso-octane) is levied in accordance with gasoline.

(2) The excise tax on petroleum ether and white oils including crude white oil, light white oil, and some industrial white oils (No. 5, No. 7, No. 10, No. 15, No. 22, No. 32, and No. 46) are levied the same rates as for solvent oil.

(3) Mixed aromatics, heavy aromatics, C8 mixture, stable light hydrocarbons, light oil, and light coal tar are subject to excise tax in accordance with naphtha.

(4) Suspend the collection of excise tax on aerospace kerosene with reference to aviation kerosene.

(5) The Notice shall come into effect on the date of publication. For the oil products listed in the Notice, no tax adjustment will be made on matters that occurred before the Notice.

Interpretation of the Notice:

(1) The Notice is to expand the collection scope of excise tax on refined oil products, clearly include multiple raw materials of refined oil blending components in the scope of taxation, and promote the standardized and healthy development of the refined oil industry.

(2) The excise tax on alkylated oil (iso-octane) is levied in accordance with gasoline, that is about RMB2 110 per ton of alkylated oil.

(3) The excise tax on petroleum ether is levied the same rate as for solvent oil, that is about RMB1 949 per ton of petroleum ether.

(4) Because products, like mixed aromatics, heavy aromatics and C8 mixture, overlapped with the raw materials of aromatics chemical production, they are included in the taxation scope of naphtha. It is estimated that each ton of the above-mentioned products needs to pay about RMB2 105 in taxes.

(5) In order to promote the development of country's air transport industry, it will suspend the excise tax on aerospace kerosene in reference to aviation kerosene.

(6) No excise tax will be levied on matters that occurred before June 30.

Related products involved in the Notice:

1. Gasoline

The introduction of the Notice means that the scope of excise tax on refined oil has been extended. Alkylate oil, mixed aromatics, heavy aromatics and other adjustable oil components shall be all subject to excise tax. Non-compliant oil-blending resources will continue to shrink, and the supply of oil-blending resources at low prices will be decreased in the market. As a result, the gasoline cost will increase significantly, which has a clear logic. After the introduction of the excise tax policy on June 30, the market prices of domestic refined oil rose subsequently. As of July 27, domestic gasoline No. 92, gasoline No. 95, and diesel oil surged by RMB323, RMB309, and RMB802 per ton respectively.

It is positively beneficial for regular gasoline resources to clarify the excise tax on various oil products. At the same time, supported by the high temperature and public travel in summer, gasoline will have a steady demand and the price is expected to be high and firm.

2. Diesel

The policy has limited benefits to the diesel market, because the extension of the levying scope of excise tax mostly involves gasoline blending. Only light coal tar No. 1 flows into the diesel field, but with small annual output. Therefore, the excise tax policy has limited impetus to the diesel market.

Since July, due to large-scale domestic traders buying stocks in advance and export profits improving, domestic diesel prices have bottomed out and rebounded sharply, with a surge of as much as RMB802 per ton within one month, an increase of about 11% month-on-month. Looking ahead, the diesel market is in a seasonal off-season, engineering infrastructure and real estate construction will have slow progress under the high temperature and rainy weather, and the coastal areas enter into fishing moratorium, all of which will continue to suppress market demand, and the demand for diesel will not expand significantly.

3. Ether C4 and alkylated oil (isooctane)

The excise tax policy has a greater influence on the post-ether C4 and alkylate markets.

After the announcement of the policy on June 30, the market price of alkylate oil increased by about RMB1 600 to RMB1 800 per ton, and the market price in Shandong province reached the highest of RMB8 750 per ton. However, the downstream has resistance to high-priced raw materials, and the upstream and downstream markets are in the run-in stage, so the market price of alkylate fell within a narrow range. Looking ahead, the demand side will be the dominant factor influencing prices. At present, the price of alkylate oil is relatively high, and the downstream is resistant to high-priced raw materials. Therefore, most of the downstream manufactures are taking a wait-and-see approach, purchasing as rigid demand. As a result, the alkylate plants are having increased inventory pressure, and may be shut down in the later period. The market is experiencing insufficient supply as well as sluggish demand, and the upstream and downstream are in the run-in stage, so the alkylate market is fluctuating at a high level.

The post-ether C4 had run out the benefit space in the early stage so the market price bottomed out and rebounded after the announcement of the policy. Judging from the price difference between post-ether C4 and alkylation, currently, the after-tax gross profit of independent alkylation units has fallen into a negative range, and some units in Henan province and other places have plans to shut down, so the demand will shrink. However, demand in other potential downstream industries can be released, such as isomerized MTBE, which is relatively profitable, providing bottom support for the price of post-ether. In the short term, refineries and downstream companies still need to find and adapt to new pricing rules. The post-ether will firstly digest the previous increase and after the raw material inventory of the downstream is consumed, the market is expected to bottom out.

4. Industrial white oil

Industrial white oil is significantly affected by the excise tax policy. Taking white oil No. 5 in the domestic market as an example, after the introduction of the policy, the market price rocketed by RMB1 075 to RMB8 870 per ton. With the raw materials price rising, the market gradually held a wait-and-see attitude, the downstream purchased goods with cautious, and the transaction was sluggish. Looking ahead, the industrial white oil market is undergoing a fluctuating and adjustment period, the terminal market is in the off-season, and downstream consumption is sluggish and negative. In addition, part of the trade is still subject to the wholesale qualification of refined oil products, with few goods purchased, and factories have relatively high pressure on sales. In consequence, the price of industrial white oil is expected to fluctuate and go downward.

If industrial white oil is levied the same rate as solvent oil, the supply and demand of the lubricating oil market may be affected indirectly. The latest excise tax policy of refined oil clearly states that some industrial white oils (No. 5, No. 7, No. 10, No. 15, No. 22, No. 32, and No. 46) will be subject to the same excise tax as solvent oils, which will effectively crack down the excise tax evasion of the above-mentioned base oil, maintain a fair taxation order, create an equal business environment, and promote the healthy development of the lubricant industry.

5. Toluene, xylene and ethylbenzene

After the implementation of the excise tax on refined oil, there are only MTBE, toluene and xylene left among the high-octane components that have not been subject to excise tax. Although toluene and xylene are not included in this levy, the prices of related oil-blending materials such as alkylate and mixed aromatics have risen sharply, which provides toluene and xylene an opportunity to rise their market price based on their obvious advantages in oil-blending. Taking Shandong province as an example, as of July 27, the market prices of toluene and xylene rose by RMB715 and RMB570 per ton respectively compared with the end of June.

As one of the important downstream of toluene and xylene, oil blending accounts for 23% and 40% of the total demand of the two respectively. Under the background of the sharp rise in the price of other oil blending components, the economy of toluene, xylene and ethylbenzene as oil blending has been greatly improved, accordingly the quantity flowing to the oil blending field will increase as well. While the demand for chemical industry is steadily following up, the increasing demand for oil blending will boost up its price. In addition, ethylbenzene, the downstream of pure benzene, also can be used as oil blending. Since oil blending components have sufficient supply in the early stage, ethylbenzene is mostly used in chemical production instead of oil blending. However, driven by profits in the later stage, it is expected that the market demand for ethylbenzene for oil blending will increase, which will also indirectly benefit the pure benzene-styrene industry chain.

6. MTBE

The main downstream application of MTBE is gasoline blending, accounting for up to 95%. When blending high-grade gasoline, it will add 10% to 15% of MTBE. MTBE is not within the scope of this levy so after the introduction of the policy, the downstream actively replenished the goods, and the manufacturers took the opportunity to rise RMB200 to RMB250 per ton, especially Shandong market hit a highest of RMB7 600 per ton. At the end of the month, the downstream finished periodic replenishment, so the market turned weak.

Looking ahead, since traders cannot deduct the input excise tax when purchasing oil blending materials, the demand for MTBE will increase in the future, which will support its price going upward. However, the proportion of MTBE added to gasoline in China is mostly 10% to 14%, no more than 15%, otherwise the oxygen content of gasoline will exceed the standard, so the growth space for MTBE demand is limited in the long run.

Summarize

1. Impact on related products

For taxed products, the total cost will be forced to rise with the addition of the taxation cost. The original supply and demand balance will be broken, and manufacturers, distributors and consumers will face new challenges. On the one hand, some small refineries may face difficulties in survival. On the other hand, some potential demand may be stimulated. The market will eventually redistribute profits through price adjustments, and then reach a new balance between supply and demand after a round of reshuffle.

For oil blending materials that have not yet been taxed, such as MTBE, toluene and xylene, the policy will have an obvious stimulus in the short-term. As the policy is gotten used to, its influence will weaken in the mid-to-long term, and the market will return to the normal track where prices are determined by supply and demand.

2. Impact on relevant business operators

This adjustment is beneficial to state-owned enterprises and large private refining and chemical enterprises. According to the regulation, the above-mentioned refineries are allowed to deduct the taxable oil products that have already paid the excise tax from the taxable amount of the refined oil excise tax. This means the taxation does not cover the components that enter the oil mixing tank for their own production. The supply of non-compliant oil blending will reduce in the society, which will benefit formal refineries to expand their market share and increase their voice.

The most influential one is social oil blenders. Because the input excise tax cannot be deducted, social oil blenders cannot transfer the cost but only to raise the price or find other oil blending components. However, currently, the components are in high price in overall, subsequently driving the the cost of oil blending higher. Consequently, the profit margin has been compressed, and its market share has been shrinking.

3. Impact on related industries

In the short term, the space for tax avoidance of refined oil has been sharply reduced, which drove the cost of oil blending for some companies. In the medium and long term, the gasoline blending industry will form a new balance among cost, market supply and demand, and price. The loopholes in oil product taxes and fees have been gradually filled, which standardized our country's refined oil tax system. The refined oil production and distribution market will be more compliant, which will help promote market fairness and standardization, and be positive for the development of the refined oil industry.