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China's tighter sulfur limit rule for ships to spur LSMGO, LSFO demand

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China's tighter sulfur limit rule for ships to spur LSMGO, LSFO demand

Highlights

LSMGO demand in Shanghai up after 0.5% sulfur limit in Yangtze Delta ECA

LSFO demand to accelerate as shipowners seek compliant fuel options

More rules loom ahead

Singapore — In less than a month, China is set to tighten its sulfur limit restrictions for ships by imposing a 0.5% bunker fuel sulfur limit in not only its initially designated Emission Control Areas but also along its entire coastline, a move likely to spur demand for cleaner fuels, industry sources said.

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"The policy will further support demand for LSMGO," a bunker trader with state-owned Chinese trader, Sinochem, told S&P Global Platts.

Low sulfur fuel oil demand is also set for a significant rise, thanks to the new rule, sources said.

China's apparent demand for low sulfur marine gasoil 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.

China's Ministry of Transport announced early December the expansion of the Emission Control Areas to encompass China's entire coastline compared to the initial area covering Yangtze Delta, Pearl River Delta and Bohai Rim applied to vessels sailing within 12 nautical miles off the coast.

As part of the latest move, large vessels will be required to burn 0.5% sulfur bunker fuels while the smaller ones will have to use 10 ppm sulfur bunkers, in line with the National Phase 5 & 6 emissions, when they are in inland waterways.

The new policy also requires all seagoing vessels to use bunker fuel with 0.1% sulfur when they are entering inland waterways areas in China, starting from January 1, 2020.

China's new regulations kick off at a time when pollution from shipping, particularly sulfur emissions, has become a global concern.

Many of the country's initiatives to curb pollutants from shipping, come as part of China's 'blue sky' defense action plan and ahead of the International Maritime Organization's global sulfur limit rule for marine fuels.

The IMO rule will cap sulfur in marine fuels at 0.5% worldwide from January 1, 2020, from 3.5% currently. This applies outside the designated emission control areas where the limit is already 0.1%.

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GEARING UP TO NEW RULES

LSMGO demand in Shanghai has been rising since the implementation of the 0.5% sulfur limit in the Yangtze Delta ECA on October 1, market sources said.

This is reflected in prices, with the differential for LSMGO delivered prices between Shanghai and Singapore widening from $80/mt on October 1 to as high as $139/mt Monday, S&P Global Platts data showed.

"LSMGO is a more convenient fuel in the ECA for international vessels with more availability than LSFO," a Shenzhen-based trader said.

LSFO for bonded bunkering is not produced by China's local refineries, but is imported from Singapore, Malaysia and the Middle East, and stored at tanks in China's major ports , such as Shanghai and Zhoushan.

Still, sources say LSFO demand is also set to increase due to the impending rules.

"So far LSFO demand is not strong; however it will go up," a trader said.

"Some owners are seeking LSFO as an alternative to LSMGO," a China-based supplier said.

MORE RULES, SURCHARGES AHEAD

Some shipowners have already announced plans to levy surcharges to cope with the higher bunker fuels bills as China's environmental rules loom.

In early December, Singapore headquartered Ocean Network Express, or ONE, said it planned to implement a low sulfur fuel surcharge, or LSF, of $15/TEU for all China export cargoes shipping via Shanghai, Ningbo and Nanjing from January 1, 2019.

Earlier this year, France's CMA CGM, a container transportation and shipping company, said it had implemented a low sulfur surcharge to containers being shipped from/to the ports of Shanghai and Ningbo from November 15.

Sources said that more surcharges were expected as rules become stricter. From January 1, 2022, all seagoing vessels in China will be mandated to use 0.1% sulfur bunker fuel when they enter the ECA in the Hainan province, the Ministry of Transport said.

The Ministry is also considering plans for China to implement a 0.1% sulfur bunker fuel oil limit in all ECAs from January 1, 2025, it said.

-- Oceana Zhou, oceana.zhou@spglobal.com

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

-- Surabhi Sahu, surabhi.sahu@spglobal.com

-- Edited by Elizabeth Thang, newsdesk@spglobal.com