USDA FAS report details effects of China terminating its UCO export-tax rebate

China’s ministry of finance and the state administration of taxation announced Nov. 15 that starting Dec. 1, the 13 percent export-tax rebate on used cooking oil (UCO) would be discontinued.

Leading biobased diesel producers in China have long advocated for this change, arguing that the tax rebate undermines the country’s interests by favoring UCO exports over domestic consumption.

It appears that this policy aims to facilitate the shift from export-oriented biobased diesel production to a domestic focus that could be used within China’s circular economy, reduce low-value feedstock exports, and promote higher-value SAF exports.

UCO prices adjust dramatically

The policy announcement triggered immediate changes in UCO prices.

On the procurement side, waste-oil prices dropped significantly.

In North China, export-quality brown grease, which averaged approximately USD$940 per metric ton on Nov. 15, fell 11 percent to around USD$843 per ton by Nov. 18.

Gutter-oil prices in East China also fell, declining by 6 percent to about USD$691 per ton.

Several processing plants have paused waste-oil collection, awaiting further market developments.

On the sales side, leading Chinese UCO producers set initial December and January contract prices at USD$1,000 to USD$1,050 a ton, representing an increase of USD$100 to USD$150 per ton over previous rates.

Industry sources noted that FOB China UCO offers were rescinded, with new offers priced at least USD$150 per ton higher.

This change poses challenges for UCO traders, who rely heavily on the rebate for profitability.

The estimated rebate loss for exporters ranges from USD$109 to USD$117 per ton.

Analysts anticipate significant price volatility in the coming months, leading to potential industry consolidation as smaller traders are acquired by larger firms.

Motivations behind policy shift

The primary objective of this policy appears to support the domestic biobased diesel industry by ensuring a more stable supply of UCO feedstock.

Exporting UCO has long been seen as low-value trade, exacerbating price competition among Chinese exporters on the international market.

Additionally, the policy seemingly seeks to ease fiscal pressures on the government amid an economic slowdown and address concerns of dumping accusations from trading partners.

There are also reports that Chinese authorities are investigating abuses within the rebate system, where importers allegedly mixed palm-oil acid with UCO to claim tax rebates fraudulently.

Opportunities for Chinese biobased diesel producers

Ending the UCO export-tax rebate signals a shift towards retaining more UCO within China, which may foreshadow the introduction of SAF mandates and other biofuel-supportive measures.

While nearly 40 countries have SAF mandates, China currently does not.

The policy change should lead to a lower and more stable domestic UCO supply, encouraging producers to expand capacity or increase utilization rates.

Cost savings from this policy could enable more significant domestic investments in research and development of related downstream industries, improving competitiveness.

Additionally, challenges exist in the UCO-collection infrastructure.

EU Transport & Environment and the International Council on Clean Transportation conducted studies that estimated UCO-collection rates ranging from 57 percent to 80 percent.

These studies revealed that collection levels surpassed Chinese UCO exports and biofuel use during the periods analyzed (years 2019 and 2023).

When applying these UCO-collection rates to the supply-potential estimates from the USDA’s Economic Research Service and Foreign Agricultural Service, the projected collection volume ranges from 8.7 to 12.2 billion pounds.

Therefore, the maximum potential for UCO collection and for further expansion of biobased diesel production capacity is enormous.

The government’s supportive measures for domestic biobased diesel, highlighted in the 2024 Biofuels Annual (CH2024-0100), include the recent SAF pilot launched Sept. 18 by the National Development and Reform Commission and the Civil Aviation Administration of China.

This initiative involves 12 flights by major airlines incorporating SAF.

Potential long-term impacts

In the near term, the policy will disrupt UCO exports, ensuring a larger supply remains within China.

This shift could reduce fiscal pressure and spur domestic biobased diesel growth, particularly enhancing SAF’s competitiveness on the global stage.

This could, however, provoke the EU to reconsider its current exclusion of Chinese SAF from antidumping measures.

In the long term, the policy is expected to curb speculative-trading practices involving palm-oil imports repackaged as UCO.

As a result, palm-oil imports are projected to decline, revealing China’s true UCO-supply capacity.

Some traders are already accelerating palm-oil sales.

Over time, waste-collection operations may begin directly supplying feedstock to biobased diesel and SAF plants, bypassing intermediary traders.