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China cancels ethanol imports as tax hike threatens trade

BEIJING (Reuters) -- Chinese buyers have cancelled up to seven cargoes of ethanol due to arrive by the end of March, sources said, the first sign that a likely hike in import duties is threatening to stall demand from the world's fastest-growing market.

Based on China not listing a new ethanol import tariff for 2017, the tariff is likely to rise to 30% from 5% and that should shut imports out of the market based on current prices, said two market participants familiar with the ethanol market in China.

"Some shippers who are regular buyers washed out six or seven Q1 cargoes from the market," said one trading manager who declined to be identified.

Another source said four to five cargoes had been cancelled, while three to four cargoes that had been contracted but not paid were also cancelled.

Seven cargoes could equate to between 266,000 and 443,000 cm of ethanol. Ethanol arrivals to China in the first 11 months of 2016 hit 765,316 cm, up 51% on the prior year, while 2015 imports of 686,904 cm soared 2,741% year on year, customs data showed.

There has been some confusion over the 2017 tariff after the government said it would adjust the tax to "protect" the domestic industry but did not provide further details.

An accompanying list of products receiving preferential 5% duties in 2017 did not include ethanol, stirring speculation among traders that tariffs would revert to the normal rate of 30%.

A customs official said last month official details would be released by the end of January, but traders said they are not taking any chances.

The tariff change "kills the imports," said the trading manager.

China's imports surged in recent years after major refiners started buying up cheaper supplies from abroad to meet local demand.

Ethanol output in China, the world's third-largest producer of the fuel, has been hampered by high corn prices. Corn is the main feedstock for ethanol and the government propped up prices to boost farm incomes.

After changing its support policy last year, Beijing now wants to reduce huge stocks of the grain, some of which is no longer fit for human consumption.

Domestic ethanol costs have dropped on lower corn prices to about $725.55 a ton, or about $2.16 per gallon.

With US ethanol quoted at $1.46 per gallon this week, a 30% duty in addition to freight and other fees would wipe out any margin to be made on imports.

Reporting by Dominique Patton; Editing by Josephine Mason and Christian Schmollinger

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