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In January, three 40,000-mt cargoes of M100 fuel oil and around 100,000 mt of Venezuelan 380 CST
straight-run fuel oil were likely purchased by independent teapot refineries in Shandong, down from 320,000
mt of fuel oil in December, said sources.
This is because while fuel oil prices have fallen in the global market, the hikes in China's consumption taxes
offset that decline making imported fuel oil a more expensive option.
The import cost for January delivery M100 averaged around Yuan 4,200/mt, only about 18% lower than for
November delivery, according to Platts calculations.
In contrast, the Mean of Platts Singapore 180 CST high sulfur fuel oil assessment averaged at $279.629/mt in
January, tumbling around 63% from the November average of $455.689/mt, following crude's plunge over the
period, data showed.
Regular importers of fuel oil, like Weifang-based Luqing Petrochemical and Lianyungang-based Xinhai
Petrochemical in neighboring Jiangsu province, did not buy any imported fuel oil in January.
Luqing Petrochemical imported up to two 90,000-mt cargoes of fuel oil each month in the second half of
2014, while Xinghai Petrochemical imported 40,000 mt of M100 almost every month in the second half of last
year.
Zibo-based Qingyuan Petrochemical, which usually imports M100 via rail, said it did not buy any fuel oil for
February delivery. About 80% of its feedstock is now domestic crude, compared with almost 100% of fuel oil
in early 2014.
Crude attractive, but elusive
While crude seems to be the best option, it is not easy for the refiners to top up their tanks with the feedstock
of their choice.
Teapot refineries are allowed to use only domestic Shengli crude sold by state-owned Sinopec, and domestic
offshore crude supplied by China National Offshore Oil Corpthey can not use imported crude.
Some refiners do use imported Venezuelan Merey crude, which is heavy and sour. But refineries need a
crude import quota to use imported crude and only ChemChinaa state-owned chemicals producer, has
been granted a 10 million mt/year crude import quota until now.
But since the end of last year, there has been ample supply of local crude from Sinopec as the state-owned
refiner imported more and used less of the domestic Shengli grade.
China's crude imports in January were at 27.98 million mt, or an average 6.62 million b/d, easing from a
record high 7.18 million b/d in December, according to preliminary data from the General Administration of
Customs released Sunday.
As teapot refiners had more domestic crude available, their dependence on fuel oil dropped with crude
making up a record high 88% of their feedstock mix in December and January, according to JYD, which does
a monthly survey polling over 30 teapot refineries in Shandong.
There are many advantages for purchasing local crude. There is no consumption tax on crude. The cost of
domestic Shengli crude is much lowerthe average price for February-delivery Shengli was Yuan 2,000/mt,
in comparison to Yuan 4,500/mt for February-arrival M100, sources said.
Also, it is "more flexible to purchase domestic crude from the spot market than importing fuel oil from the
international market, especially when crude prices [are] on a downward trend," said a source with a teapot
refinery in Dongying.
Teapot refiners can opt to purchase crude in small 10,000 mt to 20,000 mt parcels, but have to import fuel oil
cargoes of at least 80,000-90,000 mt and pay a deposit equivalent to up to 50% of the value of the cargo in
order to get their banks to issue a 90-day Letter of Credit.
With the growing reliance on crude oil as feedstock, the government this year is widely expected to give more
clarity on how the non state-owned entities can apply to import crude oil, which would potentially stimulate
crude demand as well.
Analysis by Daisy Xu
Document PON0000020150312eb2c00001