China’s independent refineries are snapping up fuel oil, resuming imports after a nearly five-year hiatus, as Beijing’s crackdown on crude oil quota trading along with new fuel taxes limit refinery feedstock options.

Five companies, including four refineries based in Shandong province and one local trader, booked 5.2 million barrels of fuel oil from Russia and the Middle East in recent few weeks for deliveries from late June through July, four traders and two refinery officials familiar with the transactions told Reuters.

Independent refiners’ fuel oil purchases dropped off sharply from 2016 after Beijing allowed them to process imported crude oil under a quota system. These refiners have also been importing bitumen blend as a feedstock.

However, a recent crackdown on the trading of import quotas and the introduction of hefty taxes on bitumen blend have now reduced supplies – and options – for small refiners, the sources said.

“The quota investigations are making refiners worried that they won’t have enough permits for the rest of year,” said Zhou Mi, crude analyst with Shandong-based consultancy JLC.

The fuel oil purchases highlight the mounting challenges facing China’s smaller refiners, known also as teapots, as Beijing works to consolidate its bloated refining sector and reduce emissions. But they also represent a lucrative opportunity for traders with access to supplies from Russia, the Middle East and Singapore.

Suppliers of these shipments, mostly straight-run fuel oil, a refinery residue that can be further processed into higher-value diesel and gasoline, include global traders Vitol, BP, Trafigura and Chinese major PetroChina.

All the four companies did not immediately respond to request for comment.

Beijing introduced a hefty consumption tax on bitumen blend, among other products, this month, making imports uneconomical.

Fuel oil is also subject to a consumption tax of approximately $32 a barrel, but faces import tariffs of only 1-3% versus 8% for bitumen blend.

“We’re in a transitional phase…testing out fuel oil which compared to bitumen blend has a lower import tariff and works better in economics,” said a teapot executive at one of the buyers.

Despite costing more than crude oil, teapots could still make a profit processing fuel oil as Chinese refining margins estimated at around 655 yuan ($102.58) per tonne by end-May were at their highest so far this year, supported in part by the new taxes on blending stocks, JCL’s Zhou added.

China’s surging residual fuel imports could, however, trim supplies elsewhere in the Asian low-sulphur marine fuel market.

“(This) should have a trickle down effect on 0.5% (VLSFO prices) in Singapore as the majority of these grades were going to the VLSFO bunker blend pool,” said a fuel oil trader.
Source: Reuters (Editing by Gavin Maguire and Kim Coghill)