Demand for imported fuel oil as feedstock at teapot refineries in East China’s Shandong province remains weak after the week-long Lunar New Year holiday, with the market now watching out for the release of additional crude import quotas, sources said Thursday, February 26.
“With the government [likely to] allocate more crude quotas to teapot refineries, demand for imported fuel oil as feedstock will probably continue to be squeezed,” said a Shandong-based trader.
Early last week, the National Development and Reform Commission released a circular outlining rules stating that qualifying refiners that want to apply for crude import quotas must permanently shutter small primary processing units.
In the case of teapot refineries in Shandong, around 15 refiners have crude distillation units under 2 million mt/year (40,000 b/d) in size, while one refiner has a CDU larger than 2 million mt/year in capacity.
These refiners would probably be able to apply for new crude import quotas provided they meet the regulatory requirements, sources said.
And once that happens, fuel oil demand from teapot refiners such as the 4.8 million mt/year Huifeng Petrochemical in Zibo, will fall, particularly since their fuel oil procurement costs have gone up in late 2014 following a hike in consumption tax.
Imported straight-run fuel oil such as Russian M100 or Venezuelan straight-run 380 CST high sulfur fuel oil were favored by the independent teapot refineries before 2013, with fuel oil comprising 40-50% of their feedstock mix.
However, procurement costs have shot up sharply since late 2014, after the consumption tax on fuel oil surged by 50% to Yuan 1,218 ($198)/mt.
This in turn, pushed up tariffs on fuel oil, including a 17% value added tax, by Yuan 475/mt from end-November 2014 to mid-January 2015.
Unlike state-owned oil companies, teapot refineries are mostly independent and have relatively small capacities ranging from 20,000 b/d to 100,000 b/d.
They are seen as relatively inefficient and unsophisticated compared with their state-owned peers. The teapot refineries, 80% of which are located in Shandong, account for roughly a quarter of the country’s overall refining capacity. TWO FUEL OIL CARGOES TO ARRIVE IN MARCH
Despite current thin demand from teapot refiners, a Singapore-based fuel oil trader plans to ship one 40,000-mt cargo of Russian M100 straight-run fuel oil to China in March.
The company intends to offer at a premium of around $90/mt to Mean of Platts Singapore 180 CST high sulfur fuel oil assessments on a CFR China basis, but has yet to finalize a buyer.
“Demand has been relatively weak, but the procurement cost from Russia is high,” said a source from the company.
Separately, state-owned trader ChinaOil has fixed a 280,000-mt cargo of Venezuelan 380 CST straight-run fuel oil for mid-March delivery into East China.
The entire cargo has been committed to bonded bunker trading companies, according to a company source.
For February, ChinaOil sold 180,000 mt out of a 280,000-mt cargo it has shipped in, at a premium of around $16-18/mt to MOPS 380 CST HSFO assessments on a CFR Shandong basis.
Huifeng Petrochemical and the 5 million mt/year Rizhao-based Lanqiao Petrochemical were the buyers. FEB DEMAND FOR BITUMEN BLEND RISES
Demand for bitumen blend, which has similar properties as fuel oil but consumption tax free, has continued to rise in February, sources said.
About eight cargoes, each 90,000 mt to 100,000 mt in size, of bitumen blend were estimated to have been fixed for February arrival at Shandong ports, up from four cargoes totaling 410,000 mt last month.
Looking ahead for March, Weifang-based Luqing Petrochemical, is due to receive a 100,000-mt cargo from Malaysia next month, according to sources.
The teapot refiner had been importing up to two 90,000-mt cargoes of fuel oil each month during the second half of 2014.
Premiums of bitumen blend cargoes for March delivery were heard at around $35-$40/mt to MOPS 380 CST HSFO assessments, CFR Shandong basis, similar to price levels for February delivery cargoes.
Meanwhile, a Shandong-based trader secured two cargoes for March delivery at premiums of $36-$38/mt to MOPS 380 CST HSFO assessments on a delivered basis, that will be re-sold to teapot refineries.
“Some small-sized teapot refineries that would not be qualified to apply for imported crude quotas will probably continue to import bitumen blend which is not expensive and doesn’t attract consumption tax,” said the source.