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China targets Singapore bunkering

Chinese tax reform will trigger a gradual shift in the bunker fuel market away from Asia’s dominant hub

The timing of a package of Chinese tax reforms will have a greater impact on the future of the Asian bunker fuel market than the new International Maritime Organization (IMO) rules on sulphur in maritime fuel that came into effect on 1 January.

China applies both consumer and value-added taxes to bunker fuels, even for bonded sales. This leads blenders to import about 90pc of the blendstocks, mostly from Singapore and Malaysia. “The tax is the big game changer,” says Dr Michal Meidan, director of the China Energy Programme at Oxford Institute for Energy Studies. Chinese refiners, she says, have been lobbying for tax relief for well over a year.

The IMO has banned ships from using fuels with sulphur content of more than 0.5pc, compared with a previous limit of 3.5pc. China has “missed the best window” to take advantage of shifting demand through its delay in providing export tax rebates for very low sulphur fuel oil (VLSFO), says Mia Geng, a consultant at Facts Global Energy (FGE) in Singapore.

“Eventually, China will be able to supply the full volume of compliant bunkers in its ports without imports” Geng, Facts Global Energy

Even if China manages to offer VLSFO at more competitive prices after the tax rebate, FGE expects minimal volume shift from Singapore. FGE does not see China’s bunkering demand growing significantly in 2020-21. “Most vessels prefer to bunker in Singapore due to greater quality assurance and competitive pricing,” Geng adds.

Local production

China’s state-owned refiners started gearing up to produce VLSFO in 2019. Between them, Sinopec, PetroChina, Cnooc and Sinochem have announced plans to produce nearly 20 mn t of VLSFO this year. Sinopec is the biggest player with 10 active refineries. These state-owned majors aim to increase production to 23 mn t in 2021, 25 mn t in 2022 and 30 mn t by 2023. According to Meidan, “there will be concerns about quality, but over time these will be ironed out.”

But in the short term, the new IMO rules have left some liners in Asia facing operating difficulties. Low sulphur marine fuel sales the Singapore in November were more than double the previous monthly record. Steve Cameron, managing director of Cameron Maritime Resources in London, says that carriers such as Pacific International Lines of Singapore have had to leave vessels anchored to wait for compliant fuel supplies. The International Bunker Industry Association has advised establishing closer relationships with bunker suppliers to ensure timely supplies of complaint fuels.

Wider tax agenda

VLSFO makes up an estimated 75pc of marine fuels sold in Singapore. Despite China having the world’s second largest refining capacity behind the US and its ports handling nearly a third of global container traffic, Meidan’s visits to the country have left her with the sense that “no-one is talking about VLSFO”. As the bunker fuel market is of minimal importance in relation to domestic market demand for oil, VLSFO is “a bit of a footnote” from a Chinese perspective.

Domestic producers are effectively closed out of the VLSFO bunkering market due to their tax burden, Meidan says. “They want a clear economic signal that this is worth it.” Geng expects that the bulk of China’s VLSFO supply will be consumed within China itself, with only surplus and some “opportunistic trading barrels” going to other regional ports.

China’s state bureaucracy works to its own timetable, rather than addressing regulations such as those from the IMO in isolation. It is treating the new sulphur rules as just one input into a much wider taxation rethink. The likeliest explanation for the tax delay, Meidan says, is that the bunker fuel changes will form part of a broader reform package that includes the reworking of consumption tax.

90pc Proportion of bunker fuel imported by China

Local government in China has limited incentive to levy consumption tax, Meidan says, and the reform will aim to give local government a greater stake in the system. She sees March this year as a reasonable estimate for the announcement of the overall package, but it may come later in the year.

Meidan expects that China will increase its share of the bunker fuel market, even if it does not overtake Singapore. China so far has concentrated on expanding its crude storage, but there is “vast potential for expansion” in bunker fuel storage capacity, she says. “If they decide something, they find the finance, space and infrastructure to do it.”

Long-term shift

Singapore is such a well-established hub that it will take time for China to rival it, Meidan says. But China will increasingly be able to export bunker fuel as its refining sophistication increases, she argues. The free trade zone at China’s Zhoushan port, where the government has relaxed restrictions on imports of marine fuels and blendstocks, is supporting the nascent market. 

Geng says that, in the long run, China is aiming to build Zhoushan and other ports into a major regional bunkering hub that is comparable to Singapore. “Eventually, China will be able to supply the full volume of compliant bunkers in its ports without imports.” 

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