China's fuel oil quotas could limit VLSFO imports
Exports of residual bunker fuel oil from Singapore and Malaysia to Chinese bunkering ports is at least 1mn t a month, said traders. Market participants have noticed that export volumes to China have decreased since March.
The slowdown in cargo movement towards China could have resulted from increased production of LSFO bunker fuel from domestic refiners. Production rose after Chinese authorities began to allow VLSFO refiners to claim a rebate on the 13pc value-added tax (VAT) paid on sales of fuel oil into the bonded market from 1 February, spurring interest in exports to bonded tanks.
March and April fuel oil exports from Singapore and Malaysia to China were estimated at around 550,000-650,000t and 650,000-750,000t respectively, according to market participants. Total February fuel oil exports from Singapore and Malaysia to China were well above 1mn t, said traders.
Chinese refiners began to ramp up the supply of fuel oil for sale into the bonded bunker market, after the announcement of approved plans to refund tax on fuel oil exports in Feburary. The increase in production volumes occurred when delivered premiums for the 0.5pc marine fuel on a fob basis at the Zhoushan port were nearing $100/t to Singapore 0.5pc marine fuel spot assessments on a fob basis.
Delivered premiums in March slumped below $50/t as Chinese refiners produced VLSFO to ease pressure from high inventories of gasoline and diesel, as Covid-19 curtailed domestic demand of transportation fuel. The delivered premium stood at $29.02/t on 30 April.
Bur traders noted that the VLSFO production from Chinese refineries to be sold into the bonded market is also very dependent on middle and light distillate profit margins. The impact of the issuance of fuel oil quotas on the country's future fuel oil import patterns is still in its early stages.
China's refining fleet is designed to minimise fuel oil output. Firm domestic gasoline and diesel prices in China could prompt refiners to easily switch to produce more distillates. This could curtail VLSFO production from refiners to be sold into bonded tanks, which could keep suppliers at Chinese bunkering ports turning to bunker fuel imports to meet bunker demand in the bonded market.
China's bonded bunker sales, including VLSFO, high-sulphur fuel and marine gasoil, totalled 13.18mn t in 2019 and were largely supplied by imported cargoes from all over the world, mostly from Singapore. Sales at Zhoushan port rose to 993,000t during January-March, up by 14pc a year earlier.