China petrochemical prices may spike in 2018 on ‘green’ tax

Source: ICIS News


SINGAPORE (ICIS)--China may be bracing for a spike in petrochemical prices next year as production cost is projected to increase when the government starts levying an environment or “green” tax as part of its strategy to combat pollution.

The tax, which will take effect on 1 January 2018 under China's Environmental Protection Law, will replace the 38-year administrative measure called pollutant discharge fee.

The petrochemical sector, together with coal and steel industries, ranks among the biggest polluters in China and will have to deal with the “green” tax.

The tax rates will vary depending on the pollutants discharged by companies. The law provided a tax range for each of the four categories of pollutants -  air, water, solid wastes and noise - to serve as a guide for local governments in setting the applicable rates in their respective jurisdictions.

Most Chinese provinces have set their green tax rates on the principle that producers' cost will not increase by much from the usual payment of discharge fees under the current system. In the case of Guangdong province, the applicable “green” tax rates will just mean a 0.01% increase in payments by companies.

The provinces of Shandong, Fujian ,Guizhou, Zhejiang, Jiangxi and Jiangsu, among others, are adopting the same strategy.

For air and water pollutants in Beijing, the tax rate was set at eight to nine times the minimum, while in Tianjin, the rate was set at 5-7 times the lowest rate, industry sources said.

But unlike the administrative pollutant discharge fee, which can be negotiated, the environment tax is definite and non-negotiable.

In the past, some local governments had exploited loopholes and exempted enterprises, which are big contributors to their fiscal revenue, said Wang Jianfan, director at the tax policy department of China’s Ministry of Finance.

The “green” tax mechanism is expected to close those loopholes and ensure equal treatment of taxpayers, Wang said, adding that it will also make enforcement easier, citing that tax evasion is a criminal liability.

Petrochemical players are widely anticipating the implementation of the tax to push up production cost and lead to higher prices of products.

“Many producers are given discounts on their discharge fee. So, the non-negotiable tax will be an added cost. They will have to upgrade their production process or install treating facilities, both need new investment,” a Guangdong-based plastics trader said.

The environment tax will very likely be used as an excuse for price increase in the coming months, with some producers and traders building up inventories to bet on future gains, the trader said.

Some industry players are still awaiting further clarification on the new tax.

“There’s only around one month left and nobody from the government side has advised us on execution of the tax. We’re much concerned on how do they measure our pollutants,” said a polyurethane producer based in Hebei.

The task of setting measurements on pollutants being discharged by producers is quite challenging, a local government official in Anhui province said.

“The Environment Tax Law lists 44 air pollutants and 61 water pollutants. Many companies have no motoring systems on their discharging mouths or equipment to identity contents of their discharges. We’re quite rushing now considering the short time left,” the official said.

Meanwhile, the tax-driven increase in production cost could also boost consolidation in China's petrochemical industry, with production likely to become more and more concentrated to deep-pocketed big producers, according to some industry sources.

“We’re 100% complying with environment rules and our pollution is far below standard,” said a source from a polymer producer based in Shandong.

“We have already invested heavily in emission cuts, such as installing treating facility and changing boiling fuel to natural gas from coal. The adoption of environment tax could somehow push the industry consolidation. This is good for de-capacity [a strategy to remove excess capacity],” the source said.

Focus article by Fanny Zhang

Picture: Smoke billows from chimneys at a chemical factory in Tianjin, China. (Source: VIEW CHINA PHOTO/REX/SHUTTERSTOCK)

($1 = CNY6.58)