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China fuel oil yield remains below 4% as industry awaits cues on tax rebates

China’s fuel oil yield will likely not rise as significantly as initially envisaged from the current 3.6% until Beijing provides tax rebates for the supply of domestically produced fuel oil to bonded bunker fuel ports and for export, industry sources told S&P Global Platts this week.

State-owned refineries had planned to kick off commercial production of very low sulfur fuel oil or VLSFO in the current quarter ahead of the International Maritime Organization’s impending global 0.5% sulfur cap on marine fuels from January 1, but are hesitating due to the lack of clarity over the widely expected tax rebate.

The VLSFO production had been expected to lift China’s fuel oil yield as these refineries have long minimized fuel oil output in order maximize production of higher value-added products like gasoline, jet fuel and gasoil.

“We have suspended our VLSFO output temporarily now due to negative margins as there are no tax rebates yet,” a source with a Sinopec refinery on China’s east coast said Tuesday.

This refinery had planned to produce 20,000-30,000 mt/month of VLSFO, but supplied only a few thousand metric tons of the fuel in both September and October, the source added.

“As 2020 is coming, we started to produce 0.5% sulfur fuel oil, but the volume is capped at about 4,000 mt this month due to limited storage capacity when there is no tax-free access for sales yet,” another source with a second Sinopec refinery said.

The second source said his refinery had to temporarily put VLSFO barrels in storage while waiting for updates from Beijing on tax rebates for exports. Restricted by its fuel oil tanks’ capacity, it was unable to lift production until it secured outlets for the existing barrels, he said.

Fuel oil produced in China currently incurs a consumption tax of Yuan 1,218/mt ($173.4/mt) and 13% VAT when barrels are sold into bonded bunker ports or for export.

“China’s fuel oil yield for Q4 stays largely the same as in recent months and is expected to rise after the end of the year with the new tax policy going into effect,” S&P Global Analytics said.

Chinese suppliers will be able to compete in international markets only when producers receive tax rebates, sources said.

China’s four leading state-owned refiners are targeting having around 18 million mt/year of VLSFO output capacity in 2020.

This includes 10 million mt/year at Sinopec, the world’s biggest refiner by capacity and throughput, which produced just 1.68 million mt of fuel oil in 2018, according to company data.

DOWNWARD PRESSURE

China’s fuel oil yield averaged 3.6% over January-October, steady from the year before, even though the country’s fuel oil output rose a stronger 6.3% over the same period to 19.4 million mt, latest National Bureau of Statistics data showed Monday.

This increase in output will likely be tempered once the greenfield Zhejiang Petroleum & Chemical refinery becomes fully operational.

Zhejiang province, where the 20 million mt/year ZPC is located, produced 3.17 million mt of fuel oil over January-October, posting the highest year-on-year increase of all provinces and regions at 2.02 million mt or 175%, NBS data showed.

Sources with knowledge of the matter said ZPC was the main contributor to the increase. The complex started up its 10 million mt/year No. 2 CDU in May and supplies fuel oil only as feedstock to its sister plant Zhongjin Petrochemical.

NBS data showed fuel oil output from Zhejiang province has been in the range of 462,000-631,000 mt/month since June, after ZPC’s partial startup, far outpacing its highest level of 144,000 mt/month recorded before June.

“ZPC does not operate its secondary unit yet, leaving the fuel oil barrels to Zhongjin,” a Beijing-based analyst said.

China’s fuel oil imports fell below the usual mark of 1 million mt/month over June-October due mainly to Zhongjin Petrochemical abstaining from buying in the international market.

ZPC is set to fully start up by year end and is expected to keep all its fuel oil barrels for internal use as feedstock for its secondary units.

As a result, its fuel oil supply for external sales is expected to dry up, which will likely lower Zhejiang province’s fuel oil production in NBS data in subsequent months, sources said.
Source: Platts

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