China plugs tax loophole with import levies for key blending fuels

BEIJING/SINGAPORE (Reuters) -China will introduce hefty taxes on imports of light cycle oil (LCO), mixed aromatics and diluted bitumen from June 12 aiming to curb imports blamed for worsening a fuel surplus and polluting the environment.

Authorities in south China have recently cracked down on illicit trade and sales of LCO, a blending fuel for diesel.

The charges will inflate the cost of buying from regional suppliers such as South Korean refiners and international traders which in recent years have sold China record volumes of these fuels cashing in on tax loopholes.

"A small number of companies have imported record amounts of these fuels and processed them into sub-quality fuels which were then funnelled into illicit distribution channels, threatening fair market play and also causing pollution," the Ministry of Finance said in a statement.

"This is drastic news," said a Singapore-based trader.

"It will affect gasoil cracks going forward as potentially there will be more supply of gasoil in the region," he said, referring to refiners' margins for the product.

The tax will bolster domestic prices of diesel and gasoline in a boon for state refiners, said local consultancy Sublime China Information.

China will impose a 1.52 yuan ($0.2363) per litre consumption tax on imported LCO and mixed aromatics, the latter a blending component for gasoline.

The levy on diluted bitumen will be 1.20 yuan per litre.

While the tax move on LCO and mixed aromatics have been long mooted, the charge on diluted bitumen came as a surprise, traders said.

Emma Li, China oil analyst at Vortexa Analytics, said the tax on diluted bitumen, often a blend by itself of crude oil from Venezuela and refinery residues, could dampen supplies from Malaysia, a major transshipment point of the fuel for sales into China.

"The new tax will hugely discount the price advantage of Malaysian bitumen blend," said Li.

Companies that import these products as feedstock for producing ethylene and other chemical products can continue to access a waiver of the consumption tax, the ministry added.

($1 = 6.4320 Chinese yuan renminbi)

(Reporting by Muyu Xu in Beijing and Chen Aizhu in Singapore; additonal reporting by Koustav Samanta in Singapore; editing by Jan Harvey and Jason Neely)

By Muyu Xu and Chen Aizhu