Jan-Oct China Refined Oil Market Influential Event Review
1. COVID-19 Resulted in Slump in Refined Oil Consumption Volume
The breakout of COVID-19 at the beginning of 2020 impacted China’s economic development seriously. Enterprises postponed their restart of operation, and the lockdown of cities caused a significant decrease in refined oil consumption volume.
According to SCI’s statistics, in February, China’s gasoline consumption volume was 6.1787 million mt, down 46.99% M-O-M and down 46.26% Y-O-Y, and China’s diesel consumption volume was 7.2589 million mt, down 46.97% M-O-M and down 46.12% Y-O-Y.
2. Refined Oil Retail Ceiling Price Experienced Its Largest Decline
Due to the meltdown of international crude oil prices in early March, on March 17, China’s National Development and Reform Commission cut the gasoline and diesel retail ceiling prices by RMB 1,015/mt and RMB 975/mt respectively, which was the largest drop of the ceiling prices. On March 31, the retail ceiling price floor mechanism was activated, and the retail ceiling prices stayed unchanged until June 28.
On January 13, 2016, China’s National Development and Reform Commission set price floor and price ceiling in the gasoline and diesel pricing mechanism. Specifically, when the international crude oil price benchmark is over $120/bbl, the National Development and Reform Commission will not raise the retail ceiling prices of gasoline and diesel further or just slightly raise the prices. When the international crude oil price benchmark is below $40/bbl, the National Development and Reform Commission will not reduce the retail ceiling prices of gasoline and diesel further. However, refineries will have to pay for a windfall tax in that situation.
Accordingly, though the international crude oil prices were at low levels in Q2, 2020, the cost decrease at refineries was relatively limited because of windfall tax. Due to the severe competitions in the oil refining market, many participants urged the cancellation of the price floor mechanism. However, SCI reckons that from the long term, the cancellation of the price floor mechanism will impair the stabilization of the refined oil market.
3. Refined Oil Consumption Tax Reform Became a Hot Spot Again
During China’s Two Secessions in 2020, some representatives put up the topic regarding the refined oil consumption tax reform again. The topic mainly included two points: First, the collection targets of consumption tax should be transferred from producers to downstream users. Second, the type of the consumption tax should be changed to shared tax between the central government and the local government.
If the collection targets of refined oil consumption tax are changed to downstream users, the production cost at refineries will decline to some extent, while the cost at petrol stations will grow. However, basically, civilians are still the actual payers of the consumption tax. For the refined oil market, it can effectively reduce illegal behaviors in the market and help regulate market order.
Meanwhile, if the consumption tax is changed to shared tax between the central government and the local government, local government will be more active in market supervision and tax collection, reducing the tax evasion.
4. Continuous Heavy Rain in Southern China Suppressed Refined Oil Demand
In June, southern China suffered from continuous heavy rain weather, and many regions even experienced flood disasters, severely impairing the local economic development and suppressing the refined oil demand. As a consequence, the refined oil sales volume at state-owned refineries in Guizhou declined by 150kt or 20% M-O-M, and that in Anhui, Hunan and Hubei dropped by 20%-30% M-O-M. Only a few state-owned refineries in southern China finished their monthly sales tasks.
