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Outlook 2019: Asia bunker markets set for changes as IMO 2020 sulfur cap looms

Singapore — Bunker fuel markets in Asia are speeding up for a wave of changes in 2019, as the industry accelerates towards the International Maritime Organization's global sulfur cap rule starting January 1, 2020.

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While supply and demand dynamics remain uncertain ahead of 2020, market participants will be riding on a myriad of strategies geared towards the use of cleaner fuels.

Singapore, the world's largest bunkering port, will brace itself for tightening environmental rules by enhancing its strategies for distillate bunkering.

A key development to watch will be the mandate of mass flow meters for distillate delivery, scheduled for implementation by the Maritime and Port Authority of Singapore starting July 1.

In October last year, the MPA said it started acceptance tests to roll out MFMs on bunker tankers for the delivery of distillates, with the first test completed in September.

This comes at a juncture when demand projections for cleaner fuels are set to grow, especially towards the end of 2019, trade sources said.

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"While some shipowners might adopt mixed blends, using more gasoil is the only way to go as people will have to replace bunker fuel with options of lower sulfur content," a bunker trader based in Singapore said.

Market participants are expecting a surge in buying interest for low sulfur marine gasoil and low sulfur fuel oil towards the later half of 2019.

That being said, the demand for fuel oil was unlikely to vanish completely, sources said.

"With desulfurization and scrubber technology, the demand for HSFO will not die off rapidly even into 2020," another bunker trader in Singapore said.

Over in the Persian Gulf, the Fujairah port is also expected to see a gradual transition towards the use of cleaner fuels.

"Availability of low sulfur fuels is still a question so we foresee that RMG [380 CST bunker fuel] demand will still be quite consistent going into the year," a bunker trader based in Fujairah said.

Meanwhile, average bunker demand in Fujairah was expected to remain stable at around 700,000 mt/month, according to trader expectations.

"The volumes that were lost after the Qatar issue are, unfortunately, not going to be recovered," another trader based in Fujairah said.

In North Asia, demand for cleaner fuels is set to rise following China's imposition of a 0.5% bunker fuel sulfur limit for ships along its entire coastline from January 1, expanding from its initially designated Emission Control Areas.

Already, shipowners are buying larger volumes of LSMGO at China and Hong Kong ports.

"Inquiries for LSMGO are at a higher range, volumes have gone up by 50% to even 100%," a China-based trader said.

LSFO demand is also set for a significant rise. While LSFO for bonded bunkering is not produced by China's local refineries, it is imported from Singapore, Malaysia and the Middle East, and stored in tanks in China's major ports such as Shanghai and Zhoushan.

China's apparent demand for LSMGO is expected to rise 32% year on year to 8.09 million mt/year in 2019, while demand for LSFO and blended distillates would grow 44% on year to 5.12 million mt/year, Wang Zhuwei, senior analyst with S&P Global Platts Analytics said.

LSFO production is expected to ramp up this year to meet the incremental demand.

For one, Chinese oil giant Sinopec is planning to start the first commercial supply of LSFO for the bunker fuel sector from its coastal refineries from August.

While South Korea will not be implementing any sulfur cap this year, refineries have started looking into the production of IMO 2020 compliant low sulfur bunker fuel.

S-Oil is tentatively producing LSFO through its new residue upgrading complex, which will be operated on a full scale this year. SK Innovation is building a Vacuum Residue Desulfurization unit facility in the Ulsan Complex by 2020, while Hyundai Oilbank has been operating a solvent deasphalting process in its Daesan Plant.

Competition among oil refineries in the supply of LSFO is expected to intensify.

"We are focusing on increasing refining margins by raising the oil refining segment's upgrade rate to 40.6%," a Hyundai Oilbank official said. "We will prepare for a spike in demand by establishing a sales network capable of supplying low sulfur heavy oil by October."

--Jeslyn Lerh, jeslyn.lerh@spglobal.com

--Teo Su Ling, su.ling.teo@spglobal.com

--Edited by Ikhhlaq Singh Aujla, ikhhlaq.singh.aujla@spglobal.com