China's International Energy Exchange (INE) is planning to start simulated trading in very-low-sulphur fuel oil (VLSFO) futures on 1 June, in a step towards the launch of its delayed futures contract.
The test trading will run from 1-12 June, the INE said. An official launch date was not announced.
The new contract will be open to international companies, as is the HSFO futures contract listed on INE's parent company the Shanghai Futures Exchange (SHFE).
The contract will be traded in 10t lots and denominated in yuan, with contracts listed 12 months ahead starting with January 2021. Deliveries under the contract must have viscosity of 100-380cst, maximum density of 0.991kg/m³ and maximum 0.5pc sulphur content.
Details of the delivery process have not been announced, but storage facilities in Zhoushan and Shanghai's Yangshan port in east China, which are the main delivery points for the SHFE's HSFO contract, are likely to be used for VLSFO as well.
The INE was initially hoping to launch the VLSFO contract last year, to enable participants to hedge their exposure to the emerging physical market for 0.5pc sulphur bunker fuel ahead of the 1 January start of the International Maritime Organisation (IMO) sulphur cap in marine fuels.
The move towards launching the contract comes after China introduced export tax rebates on VLSFO earlier this year, prompting domestic refineries to increase production and exports of the fuel.
It is unclear whether China's main state-controlled oil firms will trade the new futures contract. Sinopec and PetroChina are the biggest Chinese producers of VLSFO, which their refineries resell to their bunker arms headquartered in the emerging hub of Zhoushan port.
The major refineries are banned by their conservative state-owned parent companies from participating directly in the futures market. And their bunker arms, which are active in the Shanghai HSFO futures market, have taken a cautious approach.
This leaves hedge funds and futures companies, many of which are based in Shanghai, as among the most active participants in the SHFE's HSFO contract. These companies have been pushing the INE to launch VLSFO futures to help diversify their trading strategy and manage risks.
The funds typically trade the spread between Singapore 380cst HSFO cargoes and the Shanghai HSFO futures contract, reflecting China's dependence on HSFO imports — much of which come from Singapore — for 90pc of its needs. A few of these companies also import physical fuel oil cargoes from Singapore to maximise profitability from their derivative positions.
But liquidity in the Singapore 380cst HSFO market has fallen since the implementation of the IMO 2020 rules, which cap the maximum sulphur content in marine fuels at 0.5pc, down from 3.5pc previously. This has left financial companies looking for a new product.
Argus has been assessing VLSFO bunker prices in Zhoushan and Shanghai through a volume-weighted average of spot bunker trades collected on a daily basis since June last year.
Spot VLSFO trade volume reported to Argus in May rose to a record high of 55,000t in Zhoushan, while VLSFO volumes in Shanghai hit a record 28,500t in April. This represented more than 30pc of spot bunker trade volumes in Zhoushan and 25pc in Shanghai during the respective periods.
