Market and product

China's demand for ethanol imports has taken a hit, resulting in lower prices over recent weeks, as buyers have backed off amid possible import restrictions and higher domestic supply, industry sources said Friday.

Trading activity in the import market has almost ground to a halt, with buyers holding back on new purchases amid mounting anxiety that the central government might introduce measures to curb rising inflows, in tandem with policies to boost domestic production.

In particular, there was widespread speculation that levies for denatured ethanol might be hiked, and also guidelines would be revised restricting the list of acceptable denaturants for cargoes entering the country.

The measures were said to be due for implementation with effect from January 2016.

As a result, a trader said that some end-users have instructed sellers to expedite existing shipments for arrival before Christmas, in order to avoid being caught up by any possible rule changes.

Import prices have fallen as well, with the fuel-grade variant currently offered at $610-$615/mt on a CFR China basis, sources said. This compares to levels above $650/mt heard during early October.

Currently, denatured ethanol attracts a 5% import duty on top of a separate value-added tax, which stands at 17%.

While the tariff for undenatured ethanol is much steeper at 30%, virtually all imports in that category originate from Pakistan, which are exempted from import duty in China, according to official data.

Therefore, the bulk of imports have effectively enjoyed relatively low duties, giving them a clear edge over pricier domestic cargoes. DOMESTIC SUPPLY RISES ON LOWER FEEDSTOCK COST

Another reason cited by sources for the lack of import demand was a rise in domestic supply, due to lower prices of feedstock corn.

The government had recently lowered the guaranteed corn purchase price from Yuan 2,200/mt ($344/mt) to Yuan 2,000/mt on higher stocks.

Ethanol producers in the northeastern provinces are the main beneficiaries, as corn is the predominant feedstock in that region.

Along with a local government subsidy to incentivize ethanol production, this has resulted in local producers increasing run rates as the product regains profitability. Consequently, domestic ethanol prices have also adjusted downwards over the past month.

Ex-factory prices for corn-based hydrous ethanol from Heilongjiang were currently heard at around Yuan 5,000/mt ($781/mt), local sources reported, while cassava-based product had fallen to around Yuan 4,900/mt in Jiangsu province. This was at least Yuan 400-500/mt lower than levels seen prior to the lowering of corn prices, sources said. MARKET DIVIDED ON THE FUTURE OF IMPORTS

China's ethanol imports in October fell from an all-time high in September, as inflows of fuel-grade denatured ethanol slid by nearly 70%. Total imports in October stood at 68,961 cu m, according to official data from the General Administration of Customs released earlier this week.

Imports from the US were down 33% to 27,805 cu m, while Brazilian imports plunged 93% to just 3,164 cu m. However, imports of denatured ethanol remain at historically high levels despite the month-on-month fall, with 167,313 cu m entering China over January-October 2015.

There were differing opinions on the significance of October's fall in imports.

Some felt that this marked an adjustment back to the norm of relatively low imports, and said that imports had already reached their peak in September, when the arbitrage from the Americas was at its widest. They suggested that the rise of imports in recent months was just a one-off move, and would be difficult to repeat given likely tightening in official policy. "From what I gather, there would be less cargoes arriving in China in November and December," a source from a Western trading house said.

However, others were more upbeat and reckoned that imports will continue to lure Chinese buyers given that the arbitrage remained open.

"Customers are definitely still interested to buy from overseas notwithstanding their concerns ... I believe the dip is just temporary," a second source said.

A trader for an Asian company said: "Imports will certainly continue to rise next year if talk of policy changes turns out to be unfounded."