FEATURE: Zhoushan bunker sales growth lags other China ports on higher costs

Zhoushan -- China's biggest bunkering port -- expanded bunker sales in 2021 but the growth lagged the average rise of China's bunker sales during the year.

Zhoushan supplied 5.52 million mt of bunkering fuel in 2021, rising 16.9% from 4.72 million mt in 2020, showed data from the Zhoushan Bonded Bunker Fuel Association.

China's fuel oil exports rose 23% year on year to 19.27 million mt in 2021, showed the latest data from the General Administration of Customs. Most of the exports were fuel oil sold in the bonded bunker market, industry sources said.

The prices at other ports like Qingdao, Dalian and Tianjin got even more competitive than Zhoushan in 2021, which resulted in a rise in bunker sales, market sources said.

"In 2020, bunker prices at those ports were $20-$30/mt higher than Zhoushan, but the prices were only $5-$10/mt higher last year," said a bunker supplier.

Zhoushan's bunker prices dropped compared with Asia's bunkering hub Singapore. The delivered Zhoushan marine fuel 0.5%S price was 62 cents/mt lower than Singapore on average in 2021, while Zhoushan's bunker prices were $5.06/mt higher than Singapore in 2020, S&P Global Platts data showed.

Access to lower-cost bunker fuel

"Other ports got more benefits of [the] tax refund policy," said a bunker supplier based in Zhoushan.

Since the Chinese government approved a tax refund for low sulfur fuel oil sold in the bonded bunker market in 2020, China's domestic low sulfur bunker production has expanded rapidly.

The country's total low sulfur fuel oil output rose 42.3% on the year to about 11.08 million mt in 2021, showed data from local information provider JLC.

Since Zhoushan doesn't have refineries nearby, bunker fuel cargoes need to be transported from other Chinese refineries, which adds to the costs for bunker suppliers. On the other hand, bunkering ports such as Tianjin, Dalian and Qingdao have refineries adjacent to the ports, industry sources said.

There are CNPC's Dalian Petrochemical and West Pacific Petrochemical in Dalian, and Tianjin Petrochemical in Tianjin, while Sinopec has Qingdao Refining in Qingdao.

Zhoushan is less competitive in terms of cargo sourcing than other Chinese ports because bunker suppliers in Zhoushan need to pay extra costs to bring cargoes from other refineries by coastal tankers, said bunker suppliers.

"Thin margins from the delivery of LSFO at Zhoushan led some bunker suppliers to diversify their bunker fuel mix, offering other products such as high sulfur fuel oil due to unfavorable economics," a second bunker supplier said.

High freight rates

High freight rates in 2021 encouraged shipowners to take bunker fuel while ships were loading/discharging cargoes. This reduced bunker demand at ports ships visited for bunker-only purposes.

"When ships take bunker fuel while cargo loading or discharging, there is no need to wait for bunkering. But Zhoushan is a 'bunker-only' port," said a bunker supplier.

As charterers become increasingly price-sensitive amid a strong freight rate environment, more vessels are now lifting bunker fuels at Yangtze River ports where cargo operations are scheduled than making calls at major bunkering ports, according to sources from shipping companies.

"Bunker price spreads between ports along the Yangtze River and key terminals like Shanghai are generally quite narrow. In the dry bulk freight market, vessels nowadays discharge directly at final destinations to cut costs arising from last-mile deliveries," a source from a shipping company said.

More than half of the bunker demand in Zhoushan comes from ships visiting the port for bunker-only purposes, market sources said.

Receiving vessels have less restrictions when bunkering outside port limits around Zhoushan, which helps shorten laytimes, according to market sources, whereas in-port bunkering is less economically viable unless cargo works are scheduled due to delays arising from stringent pandemic-related measures mandating shipowners to apply for permits prior to arrival.

The dry bulk market was strong in 2021, market sources said. The Capesize dry bulk index averaged $30,377/d in 2021, up from $12,601/d in 2022, Platts data showed.

In addition, Zhoushan's bunker operations are often affected by weather conditions, which makes shipowners hesitant to take bunker fuel there. "There are enough tanks and barges in Zhoushan. The bottleneck is demand," said a fuel oil trader.

"Zhoushan's extremely low price will not continue. In the long run, suppliers will face the fact that Zhoushan's cost is higher," said a bunker supplier.