China's fuel oil exports quota to tilt regional bunker balances

Singapore — China's issuance of a 10 million mt fuel oil export quota for 2020 was expected to tilt regional supply and demand balances, traders said, not least because a second batch could not be ruled out.

In China, the sale of fuel oil as bunker fuel to ships plying international routes is regarded as a type of export. Sources said the the quota did not apply to actual fuel oil cargo exports.

China typically consumes around 12 million mt/month of bonded marine fuel, which was previously met in full by imports from Singapore and South Korea as Chinese refineries are geared towards producing higher value light oil products.

But the market's dynamics changed this year following the switch in the mainstay bunker fuel to a lower, 0.5% sulfur content, in line with a change in International Maritime Organization regulations.

Following that, the Chinese government on February 1 granted a rebate of a Yuan 1,218/mt ($172/mt) consumption tax and 13% value-added tax for the supply of domestically produced fuel oil as bonded bunker.

Since then, refiners have started to ramp up supply of fuel oil for bonded bunkering, even before the quota allocations were announced.

The rise in production has resulted in key Chinese ports' bunker prices dropping below regional bunkering hub Singapore's values since mid-April, signaling that China may be able to attract increased market share.

The 0.5%S marine fuel delivered in Shanghai and Zhoushan averaged $216.82/mt and $215/mt, respectively, in the second half of April, compared with $222.73/mt delivered in Singapore, S&P Global Platts data showed.

COVID-19 demand

Market sources said the 10 million mt quota was likely more than adequate to cover China's bonded bunkering demand in 2020, due to demand erosion caused by the coronavirus pandemic.

Either way, market participants have started to see a change in bunkering patterns.

"Shipowners who used to take bunker in Russia are now diverting to China instead, as the price gap has narrowed considerably, especially with the plunge in crude prices," a Shenzhen-based supplier said.

However, Chinese refiners may not maximize production of fuel oil solely for bunker fuel sales.

"Ultimately, it boils down to profit margins. There are other outlets for fuel oil besides bunker fuel," the supplier said.

Suppliers in China also said they were unlikely to cease imports altogether.

"It really depends on how prices move. If imports including freight is cheaper than domestic prices, there may be opportunistic buying," another supplier said.