FEATURE: Domestic LSFO production outpaces demand in China's bonded bunker fuel market
16th April 2021 09:41 GMT

China's ramp-up of low sulfur fuel oil production for bonded bunkering since a tax rebate was introduced in February 2020 has now outpaced demand, market sources said April 16

The 13% VAT rebate was aimed at encouraging production as part of Beijing's plans to actively expand the bunker business at domestic ports.

However, it may have succeeded too well: Domestic production of low sulfur bonded bunker fuel surged 131% year on year to 2.69 million mt in the first quarter, data from local information provider Longzhong released April 15 showed.

The country's production capacity of LSFO has risen by about 54% to nearly 20 million mt/year in 2021 from about 13 million mt/year in 2020, according to Longzhong.

Supply of bonded bunker fuel at Chinese ports totaled 16.87 million mt in 2020, up from 12 million mt in 2019, the Zhoushan Bonded Bunkering Fuels Association said Jan. 25.

With domestic supply overtaking demand, low sulfur bonded bunker fuel prices in China have dropped below those in Asia's bunkering hub of Singapore, China-based bunker suppliers said.

At China's upcoming bunkering port of Zhoushan, the delivered marine fuel 0.5%S outright price was assessed at $494/mt April 15, lower than $504/mt in Singapore, S&P Global Platts data showed.

Bad weather conditions have kept vessels away in recent weeks and inventories have piled up, Zhoushan bunker suppliers said.

"[Chinese refiners'] production levels are pre-determined and not very flexible, even when demand can't keep pace," a trader said.

Reflecting the weak fundamentals, the Shanghai and Zhoushan delivered marine fuel 0.5%S premiums to FOB Singapore marine fuel 0.5%S cargo assessments have dipped to one-year and 7-month lows of $3.24/mt and $2.24/mt, respectively, S&P Global Platts data showed.

"We have stopped importing cargoes for now; selling pressure is too high," one Zhoushan ex-wharf bunker fuel supplier based in Singapore said. Chinese suppliers had earlier supplemented domestic production with regular imports from Singapore. Domestic production accounted for 63.7% of low sulfur bunker fuel consumption in Q1, Longzhong data showed.

Quotas fail to stem growth

In Beijing's first round of fuel oil export quota allocations for 2021, 5 million mt of quotas were issued to CNPC, Sinopec, CNOOC, Sinochem and ZPC.

China's fuel oil exports are comprised solely of low sulfur marine fuel sold for bonded bunkering. Exports of domestically-produced barrels are not economic once the country's export taxes are applied.

However the quotas have not restricted production as refiners eye the developing bonded bunker fuel market, sources said.

"It is definitely enough [supply]; the problem is the lack of demand," a China based trader said.

A second round of fuel oil quotas was expected to be released in the second half of the year.

"Refiners may not fulfill the exact level of production quota that they are allocated; if profits are not justifiable, they will choose to produce other oil products over fuel oil," the trader added.

China is actively striving to expand its bunker business at domestic ports. Zhoushan has an ambitious bunker sales target of 6 million mt for 2021, up 27% from 2020, Zhoushan port's bonded zone administration committee has said.

Zhoushan port supplied 1.18 million mt of bonded bunker fuels in Q1, up 19% year on year, an official from the Zhoushan Port and Shipping Administration Bureau said April 13. The volume includes both bunker fuel oil and marine diesel oil.

Bunkerworld .,
16th April 2021 09:41 GMT