Traders are rushing to cancel loadings in North Asia of a range of oil products for sale to China, ahead of a planned Chinese consumption tax that will make the trade uneconomic.

At least two light cycle oil (LCO) cargoes have been canceled for late April loading from South Korea ahead of the planned tax on the refinery by-product, two sources familiar with the matter said on Thursday. They declined to be named as they were not authorized to speak with media.

The cargoes were purchased by Chinese companies who have in turn canceled their requirement, one of the sources said, adding that another Chinese oil trader is trying to cancel a third cargo.

Interest for May-loading LCO cargoes has also disappeared, a Japanese refining source said.

China plans to impose consumption taxes on oil by-products such as mixed aromatics, light cycle oil and bitumen blend, an import market that has swelled to nearly 20 million tonnes a year.

The move, expected in coming months, will close a loophole that allowed Chinese buyers to import light cycle oil, then on-sell it locally as low-grade diesel, avoiding the import tax that would normally be levied on diesel.

A consumption tax of 1,400 yuan ($203) per tonne could be levied for LCO, the sources said, with traders expecting the tax in May or June.

The tax advantages of LCO have led refiners to maximize production of the oil product over other fuels, the sources said.

LCO was selling at a premium to Korea gasoil prices of about $6 a barrel on a free-on-board (FOB) Korea basis at its peak earlier this year, which in turn attracted cargoes from as far away as Europe, traders said.

The premium for LCO has since dropped to about $2 to $3 a barrel, but volumes of the fuel into China have soared.

State-owned refiner Sinopec, in a proposal to the Chinese government on tightening LCO tax scrutiny, cited customs data showing LCO imports of 3.22 million tonnes from January to September 2016, up 194 pct on a year earlier.

This is equivalent to an average of about 350,000 tonnes a month. Imports swelled to as much as 600,000 tonnes a month by March, two traders familiar with the market said.

Source: Reuters (Reporting by Jessica Jaganathan; Editing by Richard Pullin)