China's fuel oil imports may fall in June after hitting a likely record high in May, with some traders estimating the drop to be as much as 50%, as lengthy wait times at customs and poor margins prompt refiners to reduce capacity or otherwise keep run rates low.
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Tightened check since mid-April has led to waiting times of as much as three weeks for crude and oil product cargoes to clear customs, as authorities crack down on product mislabeling -- mainly of bitumen blend cargoes.
The stricter checks have been mostly restricted to Shandong province, where most of the country's independent refiners reside.
This, together with poor refining margins since April, is expected to put a dent in the country's fuel oil imports going forward. China is on track to import a record of around 2.93 million mt of fuel oil in May, up 12.7% from 2.6 million mt in April, Kpler shipping data going back to January 2017 showed.
Most of those cargoes have likely come from Russia, as western sanctions and price caps limit the outlets for such cargoes and depress their prices. Kpler data showed imports of Russian fuel oil into China on track to hit a record-high 1.34 million mt in May, up from 1.11 million mt in April.
"For straight run fuel oil, a surge in feedstock demand from Chinese independent refiners has been a major supportive factor. Recent [specification] inspections by Chinese customs have mostly impacted Iranian crudes labeled as diluted bitumen, but it has also slowed things down for the imports of fuel oil," said Shu Zhang, Asia oil analyst at S&P Global Commodity Insights.
"Thus we may see some decline in China's fuel oil imports in the near term, but there would be persistent buying appetite from the teapots for cheaper feedstocks (crude and SRFO) under sanctions and price caps," she added.
A few independent refiners who rely mainly on bitumen blend as feedstock were heard to have cut their run rates as a result of the Chinese customs checks.
The General Administration of Customs has required local customs from April 14 to inspect specifications on every cargo for hazardous chemical imports, including crude oil, fuel oil and bitumen blend during customs declaration.
Traders and refinery sources also noted margins for both the domestic and export market have been weak for some time, further incentivizing refiners to keep run rates low.
"As far as I know, refiners are not producing in a high capacity for a relatively long time because of the weak demand. Not only in China but also overseas," one ex-wharf cargo supplier based in China said.
A Dongying-based independent refiner was heard to have bought in the week ended May 19, a fuel oil cargo at a premium of around $80/mt over Mean of Platts Singapore 380 CST high sulfur fuel oil on a DES basis, which was believed to be high, sources said.
"Currently there is almost no profit in cracking fuel oil as a feedstock due to the high import cost. The lengthy waiting time for clearing customs also has prevented some from buying the feedstock," a source with an independent refinery in Dongying said.
Independent refiners in the coming months may also prefer to declare some cargoes as vacuum gasoil to avoid special quality testing and longer wait times that come with fuel oil, sources said.
While importing VGO requires import quotas, it allows refiners to avoid paying import tax, sources said.
Weak fuel oil market
A lack of appetite from China may further weigh on Asian HSFO market sentiment, which has been subdued on ample availability.
Power generation demand, both in Asia and the Middle East, has been poorer than expected, with Pakistan, typically a net fuel oil importer, last week announcing plans to ramp up exports due to weak industrial demand from power companies.
Meanwhile, Bangladesh, a major outlet for fuel oil cargoes in Asia, has been cutting back on imports of the product due to a shortage of foreign currency.
Traders have also noted more arbitrage cargoes set to arrive in Asia in the coming months.
"We see more [HSFO] cargoes from the Middle East are coming into the Singapore Straits... HSFO bunker demand is stable, but not witnessing any major uptick," a trader said. "For the rest of May and the whole of June the HSFO market is looking weak."
Cash differentials for benchmark Singapore 380 CST HSFO cargoes have tumbled as a result. The differential was assessed at a premium of $4.25/mt May 24, a low not seen in almost three months. It inched up to $4.35/mt May 25.