New policy enhances competitiveness of domestic petrochemical enterprises

In the past year, several members of the 10th National Committee of the Chinese People's Political Consultative Conference in the petroleum and chemical industry raised concerns about the unreasonable taxation of naphtha. They submitted a proposal to adjust the consumption tax policy on refined oil products. This came in response to China’s implementation of a 0.2 yuan per liter excise tax on naphtha, introduced on April 1, 2006. At that time, Wang Chih-ming, an academician of the Chinese Academy of Engineering and vice chairman of Sinochem, criticized the tax as a major obstacle for the domestic petrochemical industry, making local products less competitive compared to imported alternatives. Before this year’s two national sessions, the Ministry of Finance and the State Administration of Taxation issued a circular titled “Circular on Adjustment of Certain Product Oil Consumption Tax Policies.” The new regulation, effective until December 31, 2010, exempted both imported and domestically produced naphtha used as raw materials for ethylene and aromatic hydrocarbons from consumption tax. However, naphtha directly produced by manufacturers for sale remained subject to the tax. The adjustment was aimed at promoting fair competition between domestic and imported ethylene and aromatic products. According to sources from Sinopec, China still relies heavily on imports for ethylene and aromatics, with around 55% of ethylene and downstream products and 65% of chemical fiber raw materials being imported. Since joining the WTO, import tariffs on ethylene have been as low as 2%, and the provisional tariff is now zero, with no import quotas in place. As a result, domestic prices are influenced by international market prices. If the government continued to impose a consumption tax on naphtha used as a chemical raw material, it would reduce profit margins and weaken the competitiveness of domestic producers. Over the past year, the naphtha consumption tax has significantly increased production costs for domestic petrochemical companies. Large joint ventures such as Nanjing Yangba and Shanghai Secco also faced higher raw material costs. The tax, which is not deductible, reduced product price flexibility, while its inclusion in the VAT base further burdened these companies. According to the China Petroleum and Chemical Industry Association, Sinopec pays an additional 3.6 billion yuan annually in consumption tax, while PetroChina adds 1.55 billion yuan. Major ethylene projects like Nanjing Yangtze-BASF, Shanghai Secco, and Huizhou Zhonghai Shell each consume about 7.2 million tons of naphtha yearly, leading to nearly 2 billion yuan in added tax costs. With new projects like Dushanzi and Tianjin Petrochemical coming online, naphtha demand is expected to rise to 12 million tons in 2008. Additionally, due to the domestic refining pricing mechanism, some refineries avoid using naphtha to produce gasoline or diesel, which are sold at controlled prices, and instead export it to minimize losses. In 2007, China exported 1.739 million tons of naphtha, up 10.54% year-on-year. The new policy aims to block this speculative behavior by taxing naphtha used for external sales while exempting that used for ethylene and aromatics production. This should help align domestic policies more closely with industrial needs and support long-term growth in the sector.

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