Impact of mixed aromatics consumption tax

China Finance Ministry, General Administration of Customs and State Administration of Taxation jointly announced on May 14 to levy consumption tax on imported refined oil products under four HS codes, including mixed aromatics, light cycle oil and bitumen blend from Jun 12.

Consumption tax rate for mixed aromatics and light cycle oil will be at 1.52 yuan/liter, same as naphtha, and that for bitumen blend at 1.2 yuan/liter, same as fuel oil.

With high content of aromatics or bitumen, those products can not be used as fuel oil, however, some companies have been importing large amount of those products to process into unqualified fuel oils that do not meet national standard. The illegal business causes inequality in refined oil market, and also bring about potential safety hazard as well as environmental pollution. To close the loophole, the consumption tax will be implemented on those three products.

The consumption tax on mixed aromatics could impact on domestic refined oil products market as well as aromatics market.

1. Refined oil products

Chinese blenders would flexibly choose blending components such as mixed aromatics, toluene, mixed xylenes, etc. based on the economics. Due to the high cost performance, mixed aromatics has been a preferable blending component to boost octane number. During 2016-2017, China imported more than 11 million tons a year of mixed aromatics, but then, the imports declined sharply in 2018 as stricter regulations on blending caused squeezed profits. Even though the profits were crunched, China’s mixed aromatics imports still reached more than 4 million tons a year during 2018-2020. In the first quarter of 2021, the imports amounted to 1.72 million tons.

After the implementation of consumption tax of 1.52 yuan/liter, the importing cost for light cycle oil and mixed aromatics would increase by 1,700-1,900yuan/mt. The rising cost could drive up gasoline and diesel prices in China. Thus, state-owned and independently refineries could see improvements in sales of standard refined oil prices.

2. Toluene and mixed xylenes

Toluene and mixed xylenes are superior blending components due to the high octane number and low sulphur content. However, there’re restrictions in purchasing and transporting toluene as it’s a kind of precursor chemical. Meanwhile, in the consideration of economics, blenders could choose mixed aromatics or MTBE if they are cheaper than toluene. As for MX, there’s fewer restrictions, and it is easy to use. Blender usually make their choices based on the profits.

With the implementation of consumption tax, importing cost for mixed aromatics could increase and thus its advantage would be undermined, which could lead to reduction in imports. Meanwhile, with refined oil product prices rising while mixed aromatics imports drying up, demand for toluene and MX would increase, resulting in prices advancing up.

In the medium term, refined oil product capacity is excessive in China. State-owned and independent refineries could raise operating rates as unqualified refined oil products reduced as a result of increasing cost for imported light cycle oil and mixed aromatics.

In addition, if China scales back mixed aromatics imports, producers outside China may turn to extracting toluene and MX from mixed aromatics, and then exporting to China.

In addition, the announcement also points out that companies importing those three products to process into chemicals such as ethylene or aromatics can apply for tax rebate or tax exemption same as in importing naphtha. Therefore, if international mixed aromatics prices fall due to fewer imports to China in the future, Chinese companies may import mixed aromatics to process into toluene and MX.

3. PX

The implementation of consumption tax has no direct impact on PX, but indirect impact may come through affecting toluene and MX.

PX is produced from crude oil in refining and chemical integrated plants, from naphtha or condensate in plants that purchase the feedstock, from MX in plants that purchase merchant feedstock MX and from toluene via STDP process. In China, most PX is produced from refining and chemical integrated facilities or plants that purchasing naphtha or condensate; some plants also purchase MX as feedstock and most refineries are equipped with STDP units, but there’s not a stand-alone STDP plant. Therefore, if toluene and MX prices rises on higher blending demand as a result of reduction in mixed aromatics imports, the profits of selling toluene and MX could be better than using them to produce PX and benzene. Then, some companies may shut MX to PX unit and STDP unit, while selling toluene and MX instead, which could lead to drop in PX production, but it is now unlikely to happen under the current situation. Benzene profit is now healthy, and TDP margin is good, incentivizing companies to keep producing. However, MX to PX units are under losses. If MX price keeps strong, those MX-PX producers could be under pressure.

In a conclusion, the implementation of consumption tax could drive up toluene and MX prices in China in the short term, but would little affect PX supply fundamentals. The proportion of MX to PX is small in PX production, and plants usually use internal MX for PX production. In the medium term, it should be focused on the material balance and profits of the refineries, and whether refineries would fill the supply gap of refined oil products as a result of reduction in mixed aromatics imports. In addition, any change in toluene and MX exports to China should also be noted.