China's independent refineries -- actively looking for fuel oil to feed their distillation units -- are struggling to secure adequate feedstock barrels for the coming months due to tight regional supplies and high prices, market and industry sources told S&P Global Platts.
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Straight-run fuel oil was used by refiners to produce oil products, such as Russian M100, Indonesian lower sulfur wax residual, despite the barrels attracting Yuan 1,218/mt of consumption tax until the consumption-tax-free bitumen blend became popular in 2014 and the refineries gained access to more competitive imported crudes in 2015.
However, Beijing introduced consumption tax on imported bitumen blend, cargoes of blended heavy crudes, at the same rate as fuel oil from June 12, leading to independent refineries' imported crude feedstock to be largely restricted by their crude import quota.
To ensure sufficient feedstock, independent refiners emerged again in the fuel oil market, as the barrel is subjected to less import tax at 1% of its value rather than 8% of bitumen blend.
"We get more inquires for fuel oil from Shandong-based independent refineries, even during the weekend," a Guangzhou-based trader said, adding that he did not expect any deal with them in the short term due to scarce supply and as prices are not profitable for producing oil products.
Lack of supplies
With refinery upgrades in Russia, supplies of straight-run fuel oil have become very rare despite some arbitrage cargoes from Europe and Middle East flowing into Asian market occasionally, while the specification of the barrels varies from time to time, trading sources said.
Most straight-run fuel oil consumed in the Middle East is sourced locally, Iraq in particular, brought to Singapore to be blended to the refiner's desired specification before being sold to the final destination. Other sources of supply are Russia's M100 blend as well, usually sold directly to China.
"It is unlikely that those independent refineries could source adequate fuel oil to compensate for the reduction of bitumen blend," the trader said.
China imported 12.46 million mt of bitumen blend in H2 2020, data from the General Administration of Customs showed.
Moreover, it is unlikely for crude oil to be claimed as fuel oil in order to avoid consumption tax due to their different flash point in customs definition, a Shandong-based importer said. In contrast, the flash point restrictions for bitumen blend and crude are similar, generating a loophole for heavy crudes to be claimed as bitumen blend when importing.
The country also imports fuel oil, 3.55 million mt in the first four months of 2021, GAC data showed. The majority of the barrels are cracked and go to bonded bunkering markets instead of refineries, according to market sources.
Price for straight-run fuel oil with sulfur content below 1% was around $65-$70/mt against the Mean of Platts Singapore 380 CST assessment for a July-delivery cargo, according to traders and refiners.
This could be translated to about $468/mt based on the MOPS strips assessment on June 1, Platts data showed.
"Such a price [of straight-run fuel oil] is only affordable to be used as feedstock to produce petrochemical products, but not to produce oil products," said a trader who supplies 30,000 mt/month of Russian straight-run fuel oil to a petrochemical plant in eastern China.
Beijing encourages petrochemical production by imposing consumption tax exemption or rebate on the feedstocks, including fuel oil and bitumen blend.
However, Ningbo Zhongjin Petrochemical, a regular straight run fuel oil buyer for petrochemical production, has been on the sideline amid sufficient feedstock since getting its latest arrival in mid-May, a Singapore-based source with its parent company Rongsheng said.
The latest fuel oil deal taken by an independent refinery was a 100,000-mt Middle East origin cargo, which is to arrive in June.
"Most of those fuel oil is not of good economic for refining, compared with crudes, no matter of which origin," a source with the Shandong-based independent refinery said. Crude imports are not subjected to consumption tax in China, but the volume is restricted by quota.
He revealed that the price of the cargo was at ICE Brent futures minus $3-8/b, close to the price of a bitumen blend cargo.