Three private enterprises among the top 500 companies are reportedly forced to halt production due to China’s new fuel tax policy.

Multiple sources have confirmed that the Chinese Communist Party (CCP) is planning to implement a new fuel oil consumption tax deduction policy, stacked on top of the already effective tariff policy. This has led many privately-owned refineries in China that rely on fuel oil and other raw materials to incur losses, leading to production halts or indefinite maintenance plans. Analysts point out that due to peak demand, the CCP is targeting privately-owned refineries, especially those with weaker capabilities, to eliminate excess refining capacity.

According to Reuters on Monday, citing sources familiar with the matter, at least four “teapot refineries” have either closed this month or plan to shut down their atmospheric distillation units (CDU) next month following the CCP’s reduction of import consumption tax deductions on raw materials (mainly fuel oil and diluted asphalt). These refineries have a combined crude processing capacity of approximately 18 million tonnes per year, equivalent to 320,000 barrels per day.

These four refineries – Huihong Petrochemical, Kelida Petrochemical, Shandong Shangneng Group, and China Overseas Energy Technology (Shandong) Co., Ltd. – are all located in Shandong Province, a hub for refinery operations.

Huihong Petrochemical and Shandong Shangneng Group ranked 231st and 496th, respectively, on the “2024 Top 500 Chinese Private Enterprises” list. Kelida Petrochemical also previously ranked 342nd on the “2022 Top 500 Chinese Private Manufacturing Enterprises” list.

Teapot refineries, a term coined by Western media for some small-scale refineries in China, known as “local refineries” in Chinese, are predominantly owned by private enterprises.

Chinese privately-owned refineries, especially those without or with limited crude oil import quotas, rely on purchasing fuel oil, diluted asphalt, and naphtha as raw materials to produce higher value products like gasoline, diesel, and chemical products.

Crude oil import quotas refer to a policy that limits the quantity of crude oil that can be imported by the country. China’s crude oil imports are mainly divided into state-owned trade and non-state-owned trade. State-owned trade, such as the “Three Giants” oil companies, can import crude oil without restrictions, while non-state-owned trade relies on annual quotas issued by the Ministry of Commerce to local refineries. Without these quotas, local refineries cannot use crude oil as raw materials for production.

Data provided by Zhuochuang Information on January 18 shows that the theoretical annual average profits in 2024 for three production routes in the Chinese refining and chemical industry saw significant decreases. The profit theoretical annual averages for refining-aromatics, integrated refining-chemicals, and comprehensive refining were 327.54 yuan/ton, 173.92 yuan/ton, and -200.26 yuan/ton, respectively, representing a year-on-year decrease of 28.88%, 19.68%, and 705%. The profit theoretical annual average indicates the theoretical value that refining and chemical enterprises can earn per ton of crude oil processed, which is actually lower than these figures.

It is evident that the losses incurred by local refineries from the cost side range from 400 yuan/ton to 700 yuan/ton, making it unprofitable for any type of production route, leading to more production resulting in more losses, pushing privately-owned refineries to halt or bankruptcy.

A manager, who declined to be named, told Reuters that under the new policy, “it is difficult for factories to maintain production.” His factory operated at 20% capacity following 18 months of losses and has not yet resumed full operation since November 2024.

An industry insider estimated that prior to the implementation of the new tax policy, other factories had an average capacity utilization rate of about 50%.

Kpler and London Stock Exchange Group’s ship tracking data show that China’s fuel oil imports fell to below 1.7 million tonnes in December last year, compared to a seven-month high of 2.55 million tonnes in November.

Based on the calculation formula of JLC Network Technology, as of January 8, the pressure reduction operating rate of 40 refining units in Shandong was 56.36%, a decrease of 0.95 percentage points from the previous week. Some individual refineries in Dongying, Shandong, may have plans to stop production, with some refineries scheduled for maintenance around March.

JLC Network Technology is an integrated trading solution provider focusing on commodities, serving industries such as petroleum, natural gas, chemicals, plastics, rubber, fertilizers, coatings, and steel.

Under the CCP’s tax policy, if domestic enterprises use imported fuel oil, diluted asphalt, and naphtha as raw materials for production while also producing taxable products like gasoline and diesel, they can receive almost 100% consumption tax deductions. However, there have been rumors in the past six months that the tax authorities will amend this policy.

The Yongan Futures Research Center reported on January 23 that Shandong’s local refineries are facing heavy tax burdens, with several refineries undergoing tax inspections and making tax payments. Rumors regarding changes in the fuel oil consumption tax deduction policy have been circulating among refineries. Although refineries have received notifications, there is a lack of clear written documentation.

It is understood that the new policy will set deduction rates based on the yield of finished oil products, as opposed to the previous practice of blending raw materials, allowing for nearly 100% deductions. The specific implementation time of the new policy has not been decided yet, but it is expected to start around October 2024.

According to reports by Reuters on January 27, under the new tax system, companies can deduct approximately 50% to 80% of the fuel oil import consumption tax (1,218 yuan/ton or 167.18 US dollars/ton), compared to the previous full tax refund.

According to three industry trade managers’ estimates, this has resulted in a cost increase of $33 to $83 per ton of raw materials, equivalent to a loss of 300 to 600 Chinese yuan per ton.

The report points out that these factories do not have crude oil import quotas, so they have to shift their focus to fuel oil, diluted asphalt, and naphtha, reducing their competitiveness.

In September 2024, Guolian Nenghua, a leading think tank in the Chinese energy and chemical industry, reported that Shandong Province plans to calculate consumption tax deductions based on the proportion of taxable products for processing production using fuel oil, diluted asphalt, and naphtha as raw materials starting from October 2024.

This adjustment will increase tax costs by 450 to 600 yuan/ton for local refineries that process raw materials mainly using fuel oil (domestic and imported) and diluted asphalt.

Longzhong Information (formerly known as China Petrochemical Business Network established in 1988) reported on January 20 that the consumption tax rates for fuel oil, diluted asphalt, and naphtha in China are 1,218 yuan/ton, 1,218 yuan/ton, and 2,105 yuan/ton, respectively.

Furthermore, according to the announcement by the State Council Tariff and Taxation Committee of the CCP, starting from January 1, 2025, the import tariff rate for fuel oil will be increased from 1% to 3%. Regarding this, Dong Bingqin, an analyst at Guandong Futures Petrochemicals, stated that this tariff adjustment will increase the cost of importing fuel oil for local refineries by 80 to 90 yuan/ton.

In 2024, China has seen a comprehensive downturn in terms of crude oil import volume, processing volume, finished oil sales volume, and prices. Reuters pointed out that China’s demand for gasoline and diesel peaked earlier than expected, leading the CCP to start squeezing out weaker, privately-owned refineries to eliminate excess capacity.

“Migrant businesses and migrant entrepreneurs are our own people,” CCP leader Xi Jinping has said this at least twice – once in November 2018 when he hosted a symposium for private enterprises, and again during the Two Sessions in 2023 when he visited members of the Chinese People’s Political Consultative Conference who are representatives of the business sector.

During a symposium for private enterprise leaders on September 27, 2024, Zheng Zhangejie, director of the National Development and Reform Commission of the CCP, reiterated the same sentiment, stating, “Private enterprises and private entrepreneurs are our own people, and we must do everything we can to help them through difficult times.”

However, the allocation of crude oil import quotas and fuel oil consumption tax deductions indicates that State-Owned Enterprises (SOEs) are the ones considered “our own people” by Xi Jinping. Private enterprises, on the other hand, are merely used by the CCP and are embraced when needed while being sidelined when deemed unnecessary.