In China, where policy plays a leading role and the market structure is not yet stable, even minor adjustments to crude oil import structures or refining policies can quickly trigger a chain reaction from upstream to downstream. These disruptions often cascade through four key segments: from refinery operations, to product balances, to export flows, and finally to end-user demand.
The following sections analyze two recent episodes that reveal how targeted policy measures transmit through refinery operations, product flow, and downstream pricing.
Export Rebate Cuts | Narrowing Export Spreads and Their Impact on Product Allocation and Domestic Pricing
The refined product export rebate adjustment introduced in early 2024 reshaped refinery-level profitability and altered product flow patterns within a short timeframe. Although intended to better align fiscal incentives with domestic policy priorities, the measure disproportionately impacted exporters with restricted crude procurement flexibility or limited blending capacity. As a result, these exporters saw their margins narrow, prompting a swift shift from export-driven output toward greater domestic supply.
China's Gasoline and Diesel Export Profits (2021-2025)
Source: Mysteel Oilchem
Following the policy transition, gasoline and diesel export profits narrowed significantly. Export profits declined from 2023 to Q1 2025, primarily ranging from -500 yuan/tonne to +500 yuan/tonne. The compression of export arbitrage windows led to a behavioral pivot across coastal refineries: product originally designated for overseas markets was redirected to domestic channels, increasing wholesale supply and altering the domestic pricing curve.
This margin erosion triggered a chain reaction:
The impact of the rebate adjustment was strongest for independent refiners and smaller exporters who did not have their own connected supply chains. As export margins shrank, these companies saw their processing profits fall, which led some to cut back on production or delay shipments. To make up for lost earnings from exports, several refineries temporarily switched to making more fuel for the domestic market, which made it harder to tell which products were meant for export and which were for local use.
Overall, the rebate change set off a chain reaction: it squeezed the profit opportunities for exports, caused refineries to adjust their output, and changed how much fuel was needed in local markets.
The special report integrates such dynamics into a broader structural framework:
- Chapter 4.3.1 details the performance of independent refiners under margin compression
- Chapter 5.1.2 models the link between product balance shifts and export trends
- Chapter 6.2.2 quantifies the profitability envelope under alternative tax rebate regimes
The special one-off report expands this framework to incorporate overlapping policy mechanisms, such as consumption tax reforms, crude import quotas, and decarbonization compliance, and their compound effects on China's refining economics and trade flows.
Feedstock Tax Adjustments | Rising Input Costs Driving Changes in Independents' Utilization and Regional Supply Patterns
During the second half of 2024, a series of policy changes increased the effective regulatory costs associated with alternative feedstocks. This was especially significant for independent refineries in Shandong that depended on imported fuel oil, which operates outside the crude import quota system. The most notable adjustment came in August 2024, when Shandong's provincial government released trial guidelines on consumption tax deduction for refined oil feedstocks. The policy reduced the allowable deduction ratio for fuel oil used as feedstock, cutting it to well below prior exemption levels. Initially implemented on a trial basis, the mechanism was formally enforced across Shandong by early 2025.
In parallel, the 2025 Tariff Adjustment Plan restructured import duties on fuel oil classifications, consolidating previously separate HS codes and removing classification discrepancies that had allowed crude-like materials to be imported under lower-tax categories. This change aims to standardize import duties and close regulatory loopholes affecting fuel oil and related product imports.
Together, these changes substantially increased feedstock costs-in some cases by several hundred yuan per tonne - effectively wiping out the already narrow processing margins for many independents. For those with restricted access to crude supplies, this additional financial pressure led to reduced throughput and prompted a wave of industry consolidation. Smaller facilities in Shandong, which lacked both the economies of scale and the compliance infrastructure seen in larger firms, were especially hard hit by these changes. The structural impact was pronounced: output was curtailed or redirected, market share consolidated in favor of larger players, and wholesale pricing rebalanced for key low-sulfur product segments. Regional divergence accelerated, reshaping supply relationships and import strategies across eastern China.
Feedstock tax adjustments drove up raw material costs and compressed processing margins, forcing cost-sensitive independent refiners without crude import quotas to cut throughput. This pressure accelerated capacity reshuffling within regional refining hubs. The resulting implications for utilization rates, product allocation, and regional market divergence are analyzed in detail across these chapters:
- Chapter 4.3.1: Profitability pressures and utilization trends among independents
- Chapter 5.3.1: Fuel oil sourcing shifts and supply balance outlook
- Chapter 6.4: Margin structures under differentiated tax and tariff regimes
Next in Focus | Macroeconomic Drivers and Industrial Impacts on Oil Demand
Both cases demonstrate how policy adjustments-whether on the exports or feedstocks side-trigger measurable responses across refining margins, throughput, and market flows.
Building on this framework, the full report extends the analysis across:
- Multi-policy convergence: How overlapping changes in tax, quota, and compliance rules interact to reshape cost structures.
- Utilization divergence and regional imbalances: Why policy impact varies between quota-bound and non-quota refiners, and across key regional product markets.
- Product chain interactions: How changes in pricing, margins, or regulatory support in one oil product segment affect supply balances, trade flows, and downstream demand across related fuels and feedstocks.
The next sections of the white paper turn to broader demand-side transitions, examining how China's post-2024 GDP trajectory will shape oil consumption growth, and which industrial shifts may most profoundly affect demand structure and product mix. These forward-looking elements complete the full-chain view of risks and opportunities across China's oil value chain.
Click here to unlock a forward-looking view of China's oil value chain-from crude imports to refined fuel trends and petrochemical strategies.
