China’s light cycle oil imports likely to rally on higher tax risk ahead
China’s light cycle oil, or LCO, imports are expected to rally in March/April amid a possibility of imposition of consumption tax on the fuel in May, traders said.
LCO, mainly supplied by South Korea, is a common blendstock for gasoil and it is used in the mining, construction, fishing, industry and agricultural sectors. A metric ton of domestic kerosene blended with imported LCO can yield 2-2.5 mt of gasoil.
“More inquiries for LCO recently, as buyers plan to bring more of the barrels in by May, as rumors say Chinese government may impose a consumption tax on the fuel in May,” a trader in southern China said.
A Shanghai-based trader said LCO offers in the domestic market has recovered to a breakeven level of about Yuan 4,200/mt ($86.4/b) from losses in the previous weeks.
China’s LCO imports fell to a six-month low of 1.32 million mt after hitting a record high of 1.84 million mt in December and retreated slightly to 1.71 million mt in January, data from the General Administration of Customs showed.
“But the coming imports may be capped as the top supplier South Korean refineries heading into a turnaround season,” a Beijing-based analyst said.
LCO imports are free from consumption tax, while it is easy to avoid paying the tax for LCO-blended gasoil. In comparison, gasoil produced from refineries, or directly imported, attracts a Yuan 1,411/mt ($28.58/b) tax.
With Beijing increasingly calling for fair competition after the “two sessions”, the chances of the fuel attracting a consumption tax has gone up again, market sources said.
The “two sessions” refer to China’s most important political event the plenary session of the National People’s Congress and the annual session of the National Committee of the Chinese People’s Political Consultative Conference, which were held in early March.
In fact, the market has heard talks several times about levying of consumption tax on LCO or other ways to damp imports since the fuel became popular in around 2016. But the volume kept rising from as low as 289,000 mt in May 2016 since Platts started to collect data for the fuel.
Once a consumption tax imposed on LCO, it is expected to be collected when the fuel is imported into China via Chinese customs, according to the country’s taxation policy.
This means it will be difficult for the fuel to evade the tax under its corresponding product name and Harmonized System (HS) code of 27079990.
However, “Chinese buyers may find other ways to bring in the fuel, like change name and HS code, if the tax issue really occurs to damp the inflow under the HS code,” the analyst said.