China's fuel oil imports are expected to drop in early 2025 following a hike in the product's import tax from Jan. 1, prompting some sellers to lower prices to boost demand, several trade sources familiar with the matter said.
The rise in import duties, which comes on top of a separate policy last October to reduce tax rebates on fuel oil shipments, will further crimp margins for China's refining sector that has been reeling from lacklustre margins since last year.
Smaller refineries, especially those without or are short of crude oil import quotas, source for fuel oil as a feedstock to produce higher-value transportation fuels.
A slowdown in China's imports is expected to weigh further on fuel oil benchmark prices in the region, which have softened since last quarter due to ample supplies.
In late 2024, Beijing adjusted import tariffs for some commodities, with the rate for fuel oil rising to 3% from 1% from Jan. 1.
Under the new rule effective Jan. 1, the government also removed the customs code for "other fuel oil and other heavy oil", a change traders said could help curb mislabelling of crude oil as residue fuel that bypasses the quota restrictions.
"We expect to see some signs of slowing demand in the short term," said a fuel oil trader who sells cargoes to China.
The sources did not want to be identified due to trade sensitivities.
Spot premiums for Russian M100 fuel oil, a popular feedstock choice for Chinese refiners, have dropped $10-$15 to below $60 a metric ton to Singapore 380-cst fuel oil quotes for January from last month.
China's imports had already fallen in December amid soft refining margins.
Fuel oil imports dropped below 1.7 million tons (348,225 barrels per day) in December, ship-tracking data from Kpler and LSEG showed, after reaching a seven-month high of 2.55 million tons in November.
Traders are also watching how the state tax bureau will roll out across China plans to lower consumption tax rebates that refiners receive once they sell gasoline and diesel fuel refined from imported fuel oil.
"We're all waiting to see how the (provincial) tax bureaux are going to execute the rebates for December imports, but the word is the government is going to take it seriously from 2025," an executive from an independent refiner told Reuters.
