SunSirs: Impact of India Extending Zero-Tariff Policy on Petrochemicals on the Chinese Toluene Market

I. Details of the Indian Policy

On June 30, India's Ministry of Finance (Department of Revenue) issued a notification extending the temporary full exemption of Basic Customs Duty (BCD) on 40 categories of key petrochemical products—including polyurethane raw materials, toluene, TDI, MDI, and polyether polyols—until July 15, 2026.

Original policy period: April 2 to June 30, 2026; this marks an additional 15-day extension.

Policy objective: To lower the landed cost of imported raw materials, alleviate raw material cost pressures for India's domestic polyurethane, coatings, automotive, and furniture manufacturing sectors, and offset the domestic aromatics supply gap.

Exempted categories: Toluene is a key beneficiary. It serves as a solvent for coatings and an intermediate for pesticides, as well as an upstream raw material for TDI and polyurethane; India’s domestic self-sufficiency is inadequate, resulting in high import dependency.

II. Underlying Dynamics of India’s Toluene Supply and Demand (Basis for Export Growth)

Following the implementation of the full BCD exemption for toluene on April 2, cost advantages emerged, leading to a significant rise in Chinese exports:

April: Toluene exports to India totaled approximately 9,200 tons, up 29.6% month-on-month.

May: Toluene exports to India totaled approximately 11,500 tons, up 25.0% month-on-month.

January–May: Cumulative exports to India reached 44,600 tons, a 53.3% year-on-year increase compared to the 29,100 tons recorded during the same period in 2025.

Persistent structural supply gap

Operating rates for Indian aromatics plants have long remained low, with domestic toluene capacity utilization below 45%. The annual supply-demand gap is approximately 500,000 tons. High-end solvent-grade and chemical-fiber-grade toluene rely almost entirely on overseas imports; overall import dependency exceeds 22%, while dependency for toluene used in the polyurethane supply chain exceeds 60%.

Sustained, inelastic downstream demand

Toluene consumption is distributed as follows: 42% for coatings, 18% for adhesives, and 15% for pesticides and pharmaceuticals. Driven by the expansion of India's automotive, building insulation, and furniture industries, the growth rate of downstream toluene consumption is projected to remain between 7% and 9% through 2026. The zero-tariff policy directly benefits the polyurethane (PU) supply chain, simultaneously boosting procurement demand for toluene used in TDI production.

Elimination of the cost disadvantage for Chinese supplies under the previous tariff regime

Prior to the exemption, India imposed a Basic Customs Duty of 10%–15% on toluene. Furthermore, South Korea, Singapore, and Thailand previously enjoyed lower tariffs due to free trade agreements, placing Chinese supplies at a cost disadvantage of over $100 per ton compared to products from Southeast Asia, Japan, and South Korea. The basic import duty has been fully waived across the board, equalizing tariff rates regardless of origin and completely eliminating the cost disadvantage previously faced by Chinese supplies.

III. Chinese Toluene Exports to India: A Breakdown of Short-Term Volume Growth

(i) Drivers of Export Growth (Immediate surge in orders during the first half of July)

Significant recovery in price competitiveness, capturing market share from Japan and South Korea

Following the implementation of the duty waiver, the CFR India cost for Chinese toluene aligned with supplies from South Korea and Singapore. Coupled with China's ample production capacity, high spot market liquidity, and shorter shipping times, Indian buyers prioritized sourcing from China. In 2025, China's toluene exports to India reached 101,600 tons, a year-on-year increase of 111.7%; in the first quarter of 2026, exports to India accounted for 6.26% of China's total exports, making it the fourth-largest export destination.

Maintenance of local TDI plants boosts demand for toluene imports

Maintenance on India's only TDI production facility was postponed until mid-July, causing a contraction in local TDI supply. Consequently, plants had to either import TDI directly or import toluene for internal processing; both approaches drove demand for toluene imports, generating additional volume.

Limited policy window drives concentrated order placement and short-term volume surges

The policy extension lasted only 15 days, with no clear announcement regarding renewal after July 15. Indian traders and downstream factories rushed to lock in prices and stock up, leading to a marked month-on-month increase in booking and shipping volumes for toluene from China during early July compared to late June.

Domestic supply-demand dynamics drive export arbitrage

In 2026, the continued ramp-up of domestic integrated refining and aromatics capacity, combined with weak domestic demand and high inventory levels for toluene, opened an export arbitrage window. Factories actively diverted supplies to the Indian market to absorb the excess inventory.

(ii) Forecast of Growth Potential

Toluene exports to India during this half-month period are projected to rise by 30%–60% compared to the same period in June. While Chinese supplies accounted for nearly 48% of India's toluene imports in June, the share of Chinese supplies during the duty-free period is expected to rise from 6% to approximately 10%, generating a temporary boost in export volume. If tariffs are reinstated on July 15, the surge in export volume will rapidly dissipate; if the deadline is extended again, the increased export volume to China can be sustained.

IV. Overall Impact on the Domestic Toluene Spot Market

Short-term bullish factors: Reduction of domestic inventories and price support

Domestic demand for toluene—spanning fuel blending, disproportionation, and coatings—is currently weak due to the off-season, leading to a continued accumulation of commercial inventories. However, the surge in exports to India has diverted available supplies, alleviating domestic oversupply pressure; this has provided a floor for spot prices in the short term and limited the scope for sharp declines, resulting in a narrowing of the drop in SunSirs' toluene benchmark price.

Shipments from ports in East and South China to India have increased, tightening spot market liquidity at ports and causing a slight strengthening of the port toluene basis spread; meanwhile, export orders for inland refineries have risen, accelerating the depletion of refinery inventories.

V. Summary

Conclusion on export volume growth: A significant, confirmed increase in China's toluene exports to India is evident leading up to July 15, with volumes rising by over 30% on a half-month-over-half-month basis. The core drivers include cost advantages resulting from tariff equalization, additional feedstock demand triggered by maintenance at Indian TDI plants, and concentrated downstream stockpiling. However, this represents only a short-term, sporadic surge rather than the foundation for long-term, sustained, and substantial growth.

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