(Bloomberg) -- China’s smaller, independent oil refineries are getting squeezed by a stricter tax regime, which could accelerate shutdowns in the embattled sector.
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The refiners, dubbed teapots, are in the crosshairs of the government’s drive to root out overcapacity. Local authorities, including in the industry’s hub of Shandong province, are targeting tax breaks on one of their cheaper feedstocks, fuel oil, which has hiked costs and forced teapots to cut run rates.
For some firms, the situation could become unrecoverable as China’s oil industry grapples with falling demand for products like gasoline due to a slowing economy and the electrification of the transport sector.
Teapots, which handle over a fifth of the country’s oil refining, are particularly vulnerable because they already operate on razor-thin margins. Straight-run fuel oil, which is mostly shipped by Russia, is an alternative for smaller plants that can’t access the government’s crude oil import quotas, and makes up about 10% of their feedstock, according to industry consultant Mysteel OilChem.
Provinces like Shandong are no longer offering refiners 100% rebates on their fuel oil purchases, according to people familiar with the matter, who asked not to be named. Instead, refiners are only getting back about 60% of their costs, after the rebate was linked to their output of products like gasoline rather than their purchases of feedstock, the people said.
Demand has also been affected by a separate increase in tariffs on fuel oil imports, from 1% to 3%, that took effect at the start of the year, they said.
“The economics of processing fuel oil as feedstock have been deteriorating for a while,” said Mia Geng, an analyst at industry consultant FGE. “The recent change in tax policy has further damped interest among refiners.”
China’s straight-run fuel oil imports in January sank to 42,000 barrels a day, the lowest since 2022, according to data tracked by Kpler. Russian suppliers are trying to lure back buyers by offering cargoes of M-100 grade fuel oil at their cheapest in 10 years, Oilchem said.
But it may not be enough given Beijing’s unwillingness to subsidize the least profitable corners of the industry, particularly just as new rules capping the nation’s refining capacity at 1 billion tons come into force this year.