May 28, 2018 / 2:18 PM / 2 years ago

China independent oil plants face closure under new tax rules, competition- exec

DONGYING, China, May 28 (Reuters) - China’s new tax rules introduced in March could force some independent oil refineries to close, and the way to survive tighter regulatory scrutiny and the onslaught of growing competition is to cut costs and beef up competitiveness, an oil executive said.

Xu Yuan, general manager of Haike Petrochemical, said the new tax rules were having a “tremendous impact” on refining margins of independent plants, which have enjoyed bumper profits in the previous two years after Beijing allowed them to import crude oil for the first time since 2015.

As of March 1, Beijing enacted new tax rules more rigidly enforcing on the refineries, known as teapots, the collection of a $38 per barrel gasoline consumption tax and $29 per barrel tax on diesel.

The new measure is aimed at stemming illicit fuel invoices allegedly used by the teapot plants and fuel blenders to evade or underpay consumption tax, officials and traders say.

The strict tax policy comes as private chemical giants Zhejiang Rongsheng Group and Dalian Hengli Group are slated to bring on stream mega refining and petrochemical complexes later this year, adding to already stiff competition in an oversupplied domestic fuel market.

“We’re going to see an industry reshuffle ... it will not be about one plant merging with another, we may see some plants fold up,” Xu said at an industry seminar at teapot base Dongying in east China’s Shandong province.

As head of Haike’s oil trading, Xu said plants will try all means to cut costs in crude oil purchases by optimizing the mix of crude oil and employing more sophisticated hedging strategies such as the trading of fuel crack spreads and options.

Haike Group, parent of Haike Petrochemical, operates 120,000 barrels per day refining capacity in Shandong.

Independent plants, making up one fifth of China’s total crude oil imports, operate relatively small and less sophisticated refining facilities versus the country’s state oil majors and most do not have the experience in fuel hedging.

In a sign of the strict tax enforcement hitting refining margins, teapot plants are once again using fuel oil to feed their plants.

Reporting by Chen Aizhu and Meng Meng, editing by David Evans

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