Mixed aromatics, a key component of blended gasoline, could be past its heyday in China as the government tightens the taxation system and also considers imposing a consumption tax on the product.
A drop in mixed aromatics use for gasoline production will have implications for China's overall gasoline supply and exports as blended gasoline, typically produced by independent blenders, accounts for up to 20% of the country's total output. The remaining 80% comes from refineries.
In China, all liquid oil products, except for jet fuel, are subject to consumption tax. But petrochemical products and illiquid products like bitumen are not as the government has been keen to encourage their production and consumption. This has left mixed aromatics outside the net of consumption tax.
This led to a surge in China's mixed aromatics imports in recent years. Blenders using mixed aromatics for blended gasoline have been able to evade the consumption tax and earn higher margins.
But the government recently overhauled the taxation mechanism making it harder for blenders to evade consumption tax on gasoline.
"Due to the upgraded tax declaration system, it has become almost impossible for gasoline blended with mixed aromatics to evade consumption tax, making it less competitive with other gasoline barrels," a Guangzhou-based trader said.
The consumption tax on gasoline stands at Yuan 1.52/liter (23 cents/liter).
"Sales of mixed aromatics slowed down in H2 2017," an importer said, adding that the taxation system had been upgraded across the country. This led to wholesalers and retailers being allowed to sell gasoline on which a consumption tax has been legally paid.
China's mixed aromatics imports in the first 10 months of 2017 rose 7.7% year on year to 8.95 million mt, compared with a rise on 134.4% in the same period of 2016, according to data from the General Administration of Customs.
Market sources said that the trend of wider tax collection was clear and expected mixed aromatics imports to fall in the future.
"There is still opportunity to import blending components for gasoline, but the price has to be low enough to cover the consumption tax on gasoline," the Guangzhou-based trader said.
Mixed aromatics is a reformate and blenders use it to raise the octane number of gasoline. It contains over 65% of aromatic hydrocarbon mixture by volume, according to the General Administration of Customs.
CONSUMPTION TAX ON MIXED AROMATICS
The government is also considering imposing a consumption tax on mixed aromatics, which would remove the price advantage that the blendstock carries, and further discourage its use.
"China is expected to levy a consumption tax on mixed aromatics, effective January 1, 2018 and to increase the tax rate gradually," a Beijing-based source with knowledge of the matter said on Saturday.
In the past, talk of an impending tax led to a surge in mixed aromatics imports. For example, earlier this year, the inflow of mixed aromatics peaked at 1.65 million mt in April as the government was expected to introduce a consumption tax in May.
But in another indication that the government has tightened the noose on tax evasion, the tax talk this time has not had any impact on imports. China's mixed aromatics imports hit a two-year low of 364,172 mt in October.
Mixed aromatics imports recovered slightly in November, but it was unlikely to rise any more this year, a Shenzhen-based importer said.
But it remains to be seen if the consumption tax will actually be implemented. China has attempted several times in the past to impose a consumption tax on mixed aromatics but has been unsuccessful.
A key challenge for the authorities has been how to separate mixed aromatics for gasoline blending from those for petrochemicals production.
China imported 8.95 million mt of mixed aromatics in the first 10 months of 2017. According to market sources, this can be blended to produce around 29 million mt of gasoline theoretically. This is in addition to the 110.3 million mt gasoline produced from refineries in the same period, according to data from the National Bureau of Statistics.
