China's H1 bonded bunker sales seen lower on year, weighing on expansion plans

China's bonded bunker sales for the first half of 2022 are on track to post a year-on-year decline, weighing on the country's ambitions of expanding its bunkering market, analysts said June 24.

High prices of low sulfur fuel oil bunkers have curbed demand in June amid lean inventories, and come on top of January-May data showing a 5.7% year-on-year decline. China's zero-COVID policy was also clouding the demand outlook for H2, the analysts said.

China's bonded fuel oil exports, or bonded bunkering volume, fell 5.7% year on year to 7.68 million mt (323,116 b/d) over January-May, General Administration of Customs data showed.

The decline came despite Beijing increasing LSFO export quota allocations by 21.9% year on year to 9.75 million mt for 2022 in two traches as of June 24 to allow quota holders to supply tax-free domestic barrels for bonded bunkering at China's ports as part of the country's efforts to build a regional bunkering hub.

"Fewer inquiries were seen and the market seems quieter since early June as high bunker prices start to bite... demand in May was definitely above June levels," a Zhoushan-based bunker supplier said.

China's bonded fuel oil exports fell 9.5% year on year to 1.41 million mt (287,798 b/d) in May, but were up 15.5% from April, GAC data showed.

Elevated premiums of delivered marine fuel 0.5%S at Zhoushan were keeping demand in June below that in May, market sources said, as suppliers grapple with dwindling supplies since April.

Zhoushan-delivered marine fuel 0.5%S bunker prices are typically assessed at a discount to the same grade in Singapore, but averaged plus $11.47/mt over June 1-23, compared with plus $24/mt in May and minus $6.50/mt in April, S&P Global Commodity Insights data showed.

Demand would pick up only when Zhoushan prices became more competitive against key regional ports, a Shanghai-based bunker supplier said.

June supply tight

The high price in Zhoushan was due to tight supply as imports fell amid high import costs, even though domestic production was estimated to be higher than in May amid throughput increases, analysts and traders said.

China's LSFO production rose 37.3% year on year to 1.19 million mt in May, and was up 6.7% from April, data from local information provider JLC showed.

However bonded bunker fuel oil imports were down 35.9% year on year at 500,452 mt in May, despite rising 44.3% from 346,856 mt in April, which was the lowest volume since 2012, when S&P Global began collecting the data.

As a result, tank storage utilization rates for all oil products remained low at 48.1% in June, despite rising 4.2 percentage points from May, with 4.67 million cu m of storage available for lease as of June 1 out of an overall capacity of 8.99 million cu m, Zhejiang Mercantile Exchange data showed.

A Zhoushan-based bunker supplier said more LSFO cargoes were expected to arrive in June and July than in May, but Kpler shipping data showed the cargoes would only discharge from late June.

Two shipments totaling 1.06 million barrels, or 167,541 mt, of LSFO were scheduled to arrive at Zhoushan and Qingdao in late June and 188,745 barrels, or 29,724 mt, at Ningbo early July, according to Kpler.

High import costs are a factor in high Zhoushan bunker prices as they cap supplies. Singapore, a cargo source for the Chinese bunker market, has seen prices hovering at historical high levels amid supply tightness. The benchmark FOB Singapore Marine Fuel 0.5%S cargo assessment averaged $1,005.88/mt over June 1-23, up from $880.14/mt in May, after reaching the then all-time high at $657.12/mt Jan. 27 since S&P Global started assessing the grade on Jan. 2, 2019.

The Marine Fuel 0.5%S cargo cash differential to swap value averaged $69/mt over June 1-23, up from $36.96/mt in May and $20.56/mt in April, S&P Global data showed.

The Platts Zhoushan-delivered marine fuel 0.5%S bunker premium to benchmark FOB Singapore Marine Fuel 0.5%S cargo assessments averaged $102.89/mt over June 1-23, up from $75.39/mt in May and $38.85/mt in April, S&P Global data showed.

H2 outlook mixed

Rising LSFO production and inflows have sparked hopes of more competitive bunker prices spurring demand at Zhoushan in July, though supplies remain less-than-ample in the short-term, traders said.

LSFO storage availability at Zhoushan was down 21.8% month on month at 766,000 cu m June 1, ZME data showed

"The fuel oil market faced the toughest of times during April-May when the lockdowns were at a peak... the situation has almost normalized and LSFO from domestic refineries might gradually raise stockpiles," a trader based in China said.

The lower fuel oil exports over January-May made it uncertain whether China can expand bunker sales as hoped in 2022. In addition to high import prices, market sources said the lockdown in Shanghai and port congestion have also hindered efforts to grow bunker sales in the country.

"As Beijing is more than likely to keep the dynamic zero-COVID strategy in 2022, we cannot say there won't be any lockdowns in the rest of they year, which is a downward risk to lift China's bunker sales," a Beijing-based analyst said.