China's mixed aromatics imports were expected to retreat in May after hitting a record high in April, then rebound strongly in June, mirroring talk about the introduction of a consumption tax on the product, market sources said Friday.
"[Mixed aromatics] imports in May will likely slow down as most traders suspended buying in April for May delivery," a Guangzhou-based trading source said.
"But Chinese buyers have returned to international market since end April when they realized the tax would not come in May," the source added.
A Beijing-based source said: "There has been a big volume of mixed aromatics cargoes booked for June delivery, which will push up the imports in next month."
China imported a record 1.64 million mt of mixed aromatics in April, up 4.6% from the previous record of 1.57 million mt in April 2016, and up 53.2% from March, General Administration of Customs data released Thursday showed.
The surge in April was spurred by traders trying to import as many barrels as possible before May 1, the date the government had been widely expected to introduce a consumption tax on the product.
China's Ministry of Finance, the State Administration of Taxation and the General Administration of Customs had been widely expected to impose a consumption tax on mixed aromatics, light cycle oil and bitumen blend on May 1, but no official announcement was made -- or has been since.
Such a tax could add Yuan 1,000-2,000/mt ($146-$292/mt) to import costs and curb inflows of the product to China, and could also stem the recent surge in oil product exports from China, market sources said.
In early April, market participants had expected details of the new tax to be released ahead of May 1 or July 1.
"The first day in a calendar month is more likely to be the start date of China's new policies. Therefore, May 1 or July 1 is more likely for the introduction [than other dates]," a market observer said.
China's LCO imports also hit a record high in April, at 764,562 mt, up 85% year on year and up 0.9% from March.
Mixed aromatics is the main blending material for gasoline, and LCO for gasoil. Bitumen blend is a mixture of fuel oil and heavy crude, which can be used as a refining feedstock.
GASOLINE GLUT
China's imports of both mixed aromatics and LCO have surged in recent years, as both are currently free of consumption tax.
The mixed aromatics inflows in April translated roughly to an extra 5.46 million mt of gasoline supply from the blending pool, in addition to the official output of 10.46 million mt from refineries.
LCO inflows could result in an additional 1.72 million mt of gasoil supply, on top of the 14.55 million mt output from refineries.
"The heavy inflow of mixed aromatics has filled up tankers and resulted in a gasoline glut due to more supply from the blending pool," said the Guangzhou-based trader.
However, Chinese importers in April reportedly stopped buying cargoes to be delivered from May onwards until clarity about the tax emerged. This included PetroChina's trading arm Chinaoil, one of the largest importers of mixed aromatics into China.
However, there has yet to be an announcement from the government, and the talk in the market is that the delay is due to the difficulty in categorizing the affected products for tax purposes.
As a result, Chinese traders have gradually returned to the market since end April to fix May delivery cargoes.
But the inflow in May was expected to be lower than in April due to the limited availability of storage and as fewer cargoes from the Netherlands, the top supplier in Europe, could reach China within a month. It normally takes five to six weeks for a clean tanker to travel from Europe to China.
"Arrivals from Europe will recover in June from May, with more and more cargoes fixed to deliver before July 1, the other possible date for the tax introduction," the Beijing-based trader said, adding the surge in April was likely to be repeated in June.
"In case the tax is imposed suddenly, Chinese buyers are allowed to cancel the cargoes which cannot arrive before the introduction, with a penalty of around $1/b to pay the seller," the source said.
Other sources said domestic oil blenders have also found alternative blending material to replace mixed aromatics as a gasoline blendstock if the consumption tax was imposed.
"The component of raw toluene is similar to that of mixed aromatics, which could also be used as the blending material for gasoline," a source in Shandong said.
"Raw toluene is a petrochemical, which will not be imposed with a consumption tax in the near term," he added.
Other market sources noted raw toluene contains benzene, which needs to be extracted before it can be used as blending material for gasoline.
