China independent refineries rush to buy straight-run fuel oil as crude quotas to fall short
7th June 2021 09:40 GMT

China's independent refineries rushed to shop at least 210,000 mt of straight-run fuel oil to secure adequate feedstock barrels as they will be short of imported crude oil quotas in the second half of the year, refinery and trade sources told S&P Global Platts June 5-6.

At least four Shandong-based independent refineries have taken eight MR-sized cargoes of straight-run fuel oil recently for late-June or early-July delivery, and most of the deals were done in June, according to the sources.

Those include four cargoes bought by Haike Petrochemical comprising three 280 CST fuel oil cargoes and one 380 CST fuel oil cargo for second-half June delivery, according to a company source.

The premiums for the 280 CST fuel oil were at $70/mt against the Mean of Platts Singapore assessment, CFR.

Chambroad Petrochemical and Dongming Petrochemical also have booked 380 CST fuel oil due to arrive later this month, with a minimum of one MR-sized cargo each.

Dongfang Hualong Petrochemical bought a fuel oil cargo in the week ended June 5.

Crude quota shortage

"Quite a few independent refineries have bought fuel oil, which is reasonable due to crude oil import quota shortage," the source with Haike Petrochemical said.

Straight-run fuel oil, such as Russian M100 and Indonesian lower sulfur waxy residue, was used by refiners to produce oil products despite the barrels attracting Yuan 1,218/mt in 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 has introduced a consumption tax on imported bitumen blend, most of which are blended heavy crude cargoes, at the same rate as fuel oil from June 12, leading to independent refineries' imported crude feedstock to be largely restricted to their

 

crude import quotas.

The independent refineries imported 8.86 million mt of bitumen blend in January-May on top of 71.81 million mt of crude in the same period, according to S&P Global Platts data. In contrast, 102.68 million mt of crude import quotas were allocated to the refineries for 2021, and about 48 million mt quotas were expected to be issued in the second batch of quota allocations for this year. This suggests around 80 million mt of quota available for the rest of the year when access to bitumen blend imports is effectively blocked.

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% for bitumen blend.

"Independent refineries would rearrange their tax cost allocation among their feedstock slate, and partly pass the consumption tax cost to oil product end-users if they need to import fuel oil," a Qingdao-based market source said.

The refiners would report higher petrochemical product yield from the crude imported via quotas to offset consumption tax costs too, the sources added.

The consumption tax collected while importing fuel oil would pass on to buyers when their refined oil products are sold, and petrochemical products are consumption tax-free as China encourages their production, according to the country's taxation policy.

Limited appetite

However, independent refiners' appetite is limited as such arrangement would narrow their profit, refining sources and analysts said.

Refiners need to pay the tax when importing the fuel oil barrels, squeezing their cash flow until they sell the oil product barrels in at least a few weeks’ time.

Moreover, "it will add about Yuan 200/mt [$31.26/mt] to a refinery’s total cost, meaning that independent refineries will have to raise their products prices when selling in the domestic market, and thus lose their low price advantage against state-owned peers," a source with a Shandong-based refinery said.

It is only the relatively comprehensive independent refineries with a complex product slate and longer value chain that are able to partly digest the tax costs this way, the sources said.

"Those simple teapots [independent refineries] with only crude distillation units have less product slate to reallocate their tax logically, which may be phased out in this round of competition,” a Jiangsu-based refining source said.


Bunkerworld .,
7th June 2021 09:40 GMT