SMALL oil refiners in China are suffering a drastic change of fortune as new tax rules, shrinking diesel demand and higher crude prices threaten their nearly three-year profit bonanza.

Industry executives and analysts said nearly 40 private refiners, often called “teapots” — which account for a fifth of China’s almost 10 million barrels per day (bpd) in crude oil imports — are losing money and market share. Several have shut for maintenance to cut exposure to the market, and some teapots may have to shut for good if the conditions continue.

“The gains in retail prices at pumps in recent weeks have been completely wiped out by higher costs of crude and a hefty consumption tax,” said Gao Jian, crude oil analyst with China Sublime Information Group.

“We expect much weaker margins in June and July as more orders booked at peak crude prices arrive,” Gao said.

Asian refining margins have thinned as crude prices LCOc1 surged amid output cuts led by the Organization of the Petroleum Exporting Countries (OPEC), Venezuela supply disruptions and looming U.S. sanctions against major exporter Iran.

But China’s teapot refiners have also been hit hard by new tax rules that cut even further into their profit. Last month, teapots lost 300 yuan (US$46.80) per ton of crude oil processed, data provided by Zibo Longzong Information Group showed.

That is a stunning reversal from a profit of 900 yuan a ton in early 2016.

China enacted new rules in March to enforce collection of a US$38-per-barrel gasoline consumption tax and a US$29-per-barrel tax on diesel, a response to the alleged use of illicit fuel invoices by many of the teapots to evade the taxes.

The teapots’ plight throws into sharp relief the performances of their State rivals, including top refiners PetroChina and Sinopec, where 2018 profits so far are running at their best in two or more years.

State refiners have to pay the consumption tax as well, but their massive local marketing networks and control of China’s fuel exports help to offset the domestic market pressures.

The teapots’ influence and size has grown significantly since they began winning crude import licenses in 2015. Last year was a blockbuster, as they churned out record earnings, expanded into petrochemicals and beefed up trading teams.

This year, in contrast, has been one of deepening trouble, with several teapots shutting for maintenance to avoid losses. Jincheng Petrochemical Co. launched a month of maintenance in May after losing money on rising crude prices since late March, said a marketing manager with the refinery.(SD-Agencies)