Analysis: China cuts VAT rates for petrochemical sector

China implemented a cut to value-added tax (VAT) rates for petrochemicals today in an attempt to boost the economy, reducing import costs for some products and boosting margins for others.

The government announced plans last month to cut the VAT rate for the manufacturing sector from 16pc to 13pc, effective 1 April. VAT rates for the transportation and construction sectors have been reduced from 10pc to 9pc.

Petrochemicals such as MTBE and aromatics, which face import duties of 4-30pc, will receive 3.12-3.9pc cuts in import costs as a result of the new VAT rates.

Any short-term gains for the paraxylene (PX) market are unclear, given uncertain demand-supply dynamics. But the VAT cut is expected to boost PX margins in the medium term by lowering feedstock costs.

Purified terephthalic acid (PTA) producers cut their offers and premiums for spot PTA fell today, likely due to the VAT cut.

The VAT cut translates to a higher yuan-denominated import-parity price for benzene and styrene monomer (SM), technically making domestic cargoes on this basis less attractive compared with import cargoes in the dollar-based cfr market. But import-parity prices are currently lower than cfr prices, even after taking into account the impact of the VAT cut.

China's domestic prices of benzene and SM rebounded this afternoon, but gains in futures markets and crude prices appeared to play a bigger role in the price increase compared to the VAT reduction.

For methanol, a 3pc VAT cut will increase profitability for consumers, particularly methanol-to-olefin (MTO) producers that are facing cash losses at current methanol values. China imports 600,000-700,000 t/month of methanol.

The impact of the VAT cut has already been felt in the polymers market, where buying interest for polyethylene (PE) and polypropylene (PP) in China was subdued in the first two weeks of March, shortly after the policy was announced.

But China-based polymer buyers then built stocks by the end of March to take the advantage of the lower VAT rate. The buyers bought material with 16pc VAT during the period and plan to sell at a 13pc VAT rate in April and pocket the difference in costs.

The VAT cut is likely to improve cash flows for plastic convertors in China over the rest of this year and is expected to spur spot sales amid PE and PP oversupply.

But China's butadiene and synthetic rubbers markets are grappling with challenges such as oversupply and continued slow demand from the tire and car industry, which have outweighed any downside impact from the VAT cut.

The lower VAT rate will eventually translate into stronger purchasing power for consumers, which will increase domestic consumption. This boost to demand comes as China's GDP growth is expected to slow to 6-6.5pc this year, in part because of the continuing trade war with the US that has led to import tariffs being imposed on petrochemicals and thousands of other products.

The US and China started a new round of trade talks in Beijing last week aimed at resolving the trade war.