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China fuel oil demand remains lackluster from teapot refineries

2015/6/8      view:
Demand for straight-run fuel oil feedstock from China's independent teapot refineries in eastern Shandong province has remained lackluster this week, as the majority of teapot refiners continue running their plants on cheaper alternative feedstocks, trade and refinery sources said Thursday. 

So far this week, just one 88,000-mt cargo of straight-run fuel oil cargo has arrived at Longkou port in Shandong to a teapot refiner. 

The identity of the buyer could not be confirmed. 

Another two VLCC cargoes of Venezuelan 380 CST fuel oil are scheduled for delivery into East China -- including Qingdao port -- later this month. 

The two cargoes fall under state trader ChinaOil's regular monthly imports, and were all sold to bonded bunker trading companies at premiums of around $15-$16/mt to Mean of Platts Singapore 380 CST high sulfur fuel oil assessments on a CFR basis, according to a company source. 

"Teapot refineries that have purchased 380 CST fuel oil previously have now turned to cheap petroleum bitumen blend instead," said the source. 

The teapot refineries -- which were major buyers of imported straight-run fuel oil cargoes prior to 2014 -- have largely switched to petroleum bitumen blend which has similar properties to fuel oil, as feedstock at coking units. 

Even high runs at teapot refineries since March has failed to pull up overall demand for fuel oil as feedstock. 

Major independent refiner ChemChina was said to be skipping Russian M100 fuel oil imports in June, according to port sources. 

The refiner's last import of the grade was a 42,000-mt cargo delivered late last week into Longkou port for its 5 million mt/year (100,000 b/d) Huaxing Petrochemical refinery. 

Meanwhile, the domestic spot market is seeing additional supply with petrochemical producer Dragon Aromatics in southern Fujian province heard trying to resell its fuel oil feedstock due to a prolonged unplanned shutdown, according to sources. 

The plant has been shut since early April following an explosion and fire, and is unlikely to restart in the short term, they added. 

Dragon Aromatics was said to be offering about 200,000 mt of fuel oil at around Yuan 4,000/mt on a FOB basis. 

But this was met with little buying interest from teapot refiners in Shandong, sources added. 

Separately, the average run rate at Shandong's teapot refineries has dropped marginally amid narrowing refining margins, as domestic oil product prices -- especially gasoil -- fell, refinery sources said. 

Shandong's teapot refineries were running at an average 45.4% of capacity over May 28-June 3, down slightly by 2.2 percentage points from the previous week, Beijing-based energy information provider JYD said in a weekly survey of 36 teapot refineries. 

The independent teapot refineries are mostly located in Shandong province and have small capacities of 20,000-100,000 b/d. The total capacity of the sector in Shandong is just over 3 million b/d, 

although utilization typically averages below 40%, mainly due to weak margins and limited access to feedstock. The plants produce mainly gasoil and gasoline for the domestic market. 

AT LEAST 6 BITUMEN BLEND CARGOES FIXED FOR JUNE 

With teapot refineries running at relatively high rates, demand for petroleum bitumen blend -- a cheaper alternative to straight-run fuel oil -- is expected to remain firm in June, although higher international oil prices could see fewer imports compared with previous months, sources said. 

So far, at least six bitumen blend cargoes, each up to 100,000 mt in size, were heard fixed for June delivery by teapot refineries. 

In comparison, up to 1.4 million mt in 10 equal size cargoes, had arrived at ports in Shandong in May. 

The June volume includes three to four cargoes fixed by Qingdao-based trader Yijia Group, which is a major mover of bitumen blend into China. 

"Cargoes arriving [in June] will be slightly less than that of May or April, as a few buyers are hesitant to purchase due to the relatively high import cost, after the continuous rebound in crude benchmarks," said a company source. 

Some of the cargoes for early June delivery into China were understood concluded at premiums of around $35-$40/mt to the MOPS 380 CST HSFO assessments on a CFR basis. 

A few cargoes were also heard priced against crude benchmarks, and concluded at discounts of $2-$5/barrel to either ICE Brent futures or Platts Dated Brent assessments, CFR basis, sources said. 

The bitumen blend cargoes have a density of 0.98-0.99 kg/l, sulfur content of 2%-3% and carbon residue of 12%-14%. 

Meanwhile, margins from processing bitumen blend were still considered pretty good by some teapot refineries despite weaker oil product prices, compared with negative processing margins for fuel oil feedstock, they said. 

Teapot refineries need to pay a consumption tax on fuel oil first when they import, but not product produced from fuel oil, such as asphalt, attracts a consumption tax. 

So teapot refineries prefer to use bitumen blend, which they can pay the consumption tax later based on the gasoline and gasoil yields, ensuring the refineries do not overpay the consumption tax on oil products. 

But there is now talk of local custom offices looking to tighten imports of bitumen blend by setting more detailed restrictions on the specifications, starting from July 1, in order to prevent teapot refineries from claiming fuel oil imports as bitumen blend to escape the consumption tax. 

Petroleum bitumen blend has become a popular feedstock for coking units for producing gasoil at teapot refineries in Shandong since late 2013 because of its lower cost, particularly for refineries that have no access to either domestic or imported crude supply. 

Demand has significantly picked up since the 50% hike in the consumption tax on fuel oil in late November 2014. 

These imports have similar properties to fuel oil, with the exception of asphaltene content, which is over 8%, versus a maximum of 2% for fuel oil. 

Since petroleum bitumen blend is not subject to consumption tax in China, these cargoes, which are typically imported from Malaysia, are exempt from the 8% import tariff, making bitumen blend a more attractive option for teapot refiners than fuel oil.