Chinese independent refineries struggle for fuel amid tight supply and high prices

Strong points

New tax on bitumen mixtures makes fuel attractive

Falling oil supplies in a straight line

Less competitive with crude

China’s independent refineries – actively seeking fuel oil to power their distillation units – are struggling to secure adequate barrels of raw materials for the coming months due to tight regional supply and high prices, told S&P Global Platts from market and industry sources.

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Straight-run fuel oil has been used by refiners to produce petroleum products, such as Russian M100, Indonesian low-sulfur wax residue, despite the barrels attracting 1,218 yuan / mt of consumption tax up to As the duty-free bitumen blend becomes popular in 2014, refineries gained access to more competitive imported crudes in 2015.

However, Beijing introduced a consumption tax on imported bitumen mixtures, mixed heavy crude cargoes, at the same rate as fuel oil from June 12, which led independent refineries to import the raw materials widely. limited by their crude import quota.

To ensure a sufficient feedstock, independent refiners have reappeared in the fuel oil market, with the barrel subject to less import taxes at 1% of its value rather than 8% of the bitumen mixture.

“We are getting more requests for fuel oil from independent refineries based in Shandong, even over the weekend,” said a Guangzhou-based trader, adding that he did not expect any deal with them in the short term. due to the scarcity of supply and prices. not profitable for the production of petroleum products.

Lack of supplies

With the modernization of refineries in Russia, supplies of straight-run fuel oil have become very scarce despite some arbitrage shipments from Europe and the Middle East occasionally flowing into the Asian market, while barrel specifications vary from from time to time, trade sources said.

Most of the straight-run fuel oil consumed in the Middle East is of local origin, particularly from Iraq, brought to Singapore to be blended to specifications desired by the refiner before being sold to the final destination. Other sources of supply are also the Russian blend M100, usually sold directly to China.

“These independent refineries are unlikely to be able to source adequate fuel oil to compensate for the reduction in the bitumen mix,” the trader said.

China imported 12.46 million tonnes of bitumen mixture in the second half of 2020, according to data from the General Administration of Customs.

Moreover, crude oil is unlikely to be claimed as fuel oil in order to avoid consumption tax due to their different flashpoint in the customs definition, said one Shandong-based importer. In contrast, the flash point restrictions for the bitumen blend and the crude are similar, creating a loophole for heavy crudes to claim as a bitumen blend upon importation.

The country also imports fuel oil, 3.55 million tonnes in the first four months of 2021, according to GAC data. The majority of the barrels are cracked and go to bonded bunkering markets instead of refineries, according to market sources.

Higher prices

According to traders and refiners, the price of straight-run fuel oil with a sulfur content of less than 1% was around $ 65-70 / mt compared to the Mean of Platts Singapore 380 CST valuation for a cargo delivered in July.

That could translate to around $ 468 / mt based on the MOPS tape valuation on June 1, according to data from Platts.

“Such a price [of straight-run fuel oil] is affordable only to be used as a feedstock to produce petrochemicals, but not to produce petroleum products, ”said a trader who supplies 30,000 tonnes / month of Russian fuel oil to a petrochemical plant in eastern China. China.

Beijing is encouraging petrochemical production by imposing a consumption tax exemption or reduction on raw materials, including fuel oil and mixed bitumen.

However, Ningbo Zhongjin Petrochemical, a regular buyer of fuel oil for petrochemical production, has been sidelined with enough raw materials since arriving in mid-May, said a Singapore-based source with his parent company Rongsheng.

The latest fuel oil deal from an independent refinery was for 100,000 tonnes of cargo from the Middle East, due to arrive in June.

“Most of these fuel oils are unprofitable for refining, compared to crudes, regardless of their origin,” said a source from the independent refinery based in Shandong. Imports of crude are not subject to consumption tax in China, but the volume is limited by quotas.

He revealed that the price of the cargo was ICE Brent futures minus $ 3-8 / bbl, close to the price of a cargo of bitumen mix.

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