New policy enhances competitiveness of domestic petrochemical enterprises

Last year, during the two sessions, several members of the 10th National Committee of the Chinese People's Political Consultative Conference from the petroleum and chemical industry raised concerns about the unreasonable taxation of naphtha. They submitted a proposal to revise the consumption tax policy for refined oil products. This followed the introduction of China’s consumption tax on naphtha on April 1, 2006, which imposed a 0.2 yuan excise tax per liter. At that time, Wang Chih-ming, an academician of the Chinese Academy of Engineering and vice chairman of Sinochem, stated that the excise duties on naphtha had significantly hindered the development of the domestic petrochemical industry, making it difficult for local products to compete with imported alternatives. Before this year’s national conferences, the Ministry of Finance and the State Administration of Taxation issued the "Circular on Adjustment of Certain Product Oil Consumption Tax Policies." The circular specified that, by December 31, 2010, both imported and domestic naphtha used as raw materials for ethylene and aromatic hydrocarbons would be exempt from consumption tax, while naphtha produced directly for sale would still be subject to the tax. The adjustment aimed to promote fair competition between domestically produced ethylene and aromatic products and their imported counterparts. According to sources within Sinopec, China's ethylene and aromatics products remain heavily reliant on imports. The temporary exemption of consumption tax on naphtha used in these products has relieved domestic companies of a significant burden, helping to improve their competitiveness. It is reported that approximately 55% of China’s ethylene and downstream products, and 65% of chemical fiber raw materials, are imported. Since joining the WTO, the import tariff on ethylene has been as low as 2%, and the provisional tariff is now zero. With no import quotas and prices largely liberalized, the cost of imported products has influenced domestic pricing. If the state continued to impose a consumption tax on naphtha used as a chemical feedstock, it could reduce profit margins and weaken the competitiveness of the domestic ethylene industry. Over the past year, the consumption tax on naphtha has led to rising production costs for domestic petrochemical companies. For large joint ventures like Nanjing Yangba and Shanghai Secco, the tax increased raw material costs. The tax, being an in-quote tax, reduced product price flexibility, and as a VAT base, it also increased the financial burden on these companies. According to the China Petroleum and Chemical Industry Association, Sinopec and CNPC incurred an additional 3.6 billion and 1.55 billion yuan in annual consumption taxes, respectively. Major ethylene projects, such as those in Nanjing, Shanghai, and Huizhou, each consume around 7.2 million tons of naphtha annually, adding nearly 2 billion yuan in tax expenses. With new projects like Dushanzi and Tianjin Petrochemical coming online, China's naphtha demand is expected to rise by 12 million tons in 2008. Additionally, due to the constraints of China’s domestic refined oil pricing mechanism, some refineries have avoided using naphtha to produce gasoline or diesel, which have controlled prices and low margins. Instead, they prefer to export naphtha to minimize losses. Customs data showed that China’s naphtha exports reached 1.739 million tons in 2007, up 10.54% year-on-year. The new policy, which exempts naphtha used for ethylene and aromatic production from tax while taxing directly sold naphtha, helps curb this speculative behavior.

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