The China Connection: IMO 2020 and Zhoushan

Author Argus

Podcast: What role will China play in the global bunker market in 2020 and beyond?

The deadline for IMO 2020 is fast approaching and China is well positioned to emerge as a key player. China is home to six of the world's 10 largest container ports, has the world's second largest refining sector and a wealth of storage and blending capacity at domestic ports. Sammy Six, deputy editor for Argus Marine Fuels, and Jonty Richardson, Argus Consulting, discuss the impact of IMO 2020 and how China is well-positioned to take a significant step forward in the bunker market post-2020.

Related links

From crude oil to metals, Argus covers a wide range of global energy and commodity markets.

Transcript

Sammy: Welcome to another episode of our "China Connection" miniseries. The series examines China's rising presence in the global commodity markets. And this episode will focus on the impact of IMO 2020 on the global supply of bunker fuels and how China is developing into a key player with the development of the Zhoushan Hub. The "China Connection" is brought to you by Argus, a leading independent provider of energy and commodity price benchmarks. My name is Sammy Six, and I'm the deputy editor of Marine Fuels. I am responsible for the daily bunker price assessment in Singapore and other key ports in Asia.

Jonty: And I am Jonty Richardson, a senior analyst in our consulting department, covering crude and refined products with a specific focus on forecasting demand, supply, and prices, in relation to IMO 2020.

Sammy: Jonty, maybe a good place to start is for you to give us a brief introduction to IMO 2020.

Jonty: So, from the first of January next year, this new regulation will reduce the maximum sulphur content for marine fuels from 3.5% to 0.5% for all vessels that are not equipped with on board scrubbers. Given that investment in on board scrubbing has been relatively light so far, only around 15% of the 200 million ton of high-sulphur bunker market will remain in 2020. This has two key implications. Firstly, there will be a significant surplus of high sulphur fuel that we will need to price a point that makes it competitive in all sense of the markets, such as power generation. And secondly, demand for compliant marine fuels will replace up to 140 million tons of high sulphur fuel in 2020. Now, this will mean that high sulphur fuel oil is an even less desirable product for refiners to produce. While compliant, very low sulphur fuel oil will offer positive returns.

Sammy: Now, this podcast series has a specific focus on China. What is it that makes China well suited to being a big player in the bunker market?

Jonty: So, there are three key factors: traffic, robust infrastructure, and access to a source of marine fuels. To address the first point, six of the 10 largest container ports globally are in mainland China, with Shanghai and Ningbo-Zhoushan occupying the first and third spots on the list. This means that there is definitely sufficient traffic to support a robust, domestic bunker market in the area. Secondly, when it comes to storage, thanks to a swathe of local investment in recent years, a number of Chinese ports are now well-positioned to store and blend sufficient volumes. While, finally, China is home to the world's second-largest refining sector. So with more than 15 million barrels a day of primary processing capacity on its doorstep, it means it will definitely have access to sufficient fuels.

Sammy: With this in mind, where does China sit in the bunker market today?

Jonty: So, at the moment, it's a relatively small player. The country's largest bunker hub accounted for less than 4 million tons of bunker demand annually, and this is compared to a Singapore market, which was around 50 million tons last year.

Sammy: Now, why is it then that China makes up such a small proportion of the market, given the advantages that you just mentioned?

Jonty: Well, historically, taxes have acted as a barrier. Refiners that are outside free trade zones can't claim back consumption and value-added taxes for fuel in the same way that they can for high-value products such as diesel and gasoline. This means that domestically sourced fuels are just not cost-competitive in an international bunker market, which has required the import of close to 90% of the marine fuel sold annually.

Sammy: I see. And is this likely to change in 2020? What can be done in China to grow the market?

Jonty: Well, the most important thing would be for China's central government to waive the consumption tax on fuel oil, which equates to around $180 per ton, as well as offering rebates on the 13% VAT that's in place. This would allow refiners across the country to produce very low sulphur fuel oil at a competitive cost. Now, the legislative changes have been talked about for a while now and are expected prior to the January 1st deadline. But, at the moment, exactly when they will be announced is unclear. To a certain extent, this can be viewed as the last piece of the puzzle in unlocking China's potential for significant growth in the bunker market because China has already made significant strides to establish hubs such as Zhoushan.

Sammy: Can you tell us a little bit more about how China has tried to grow the domestic bunker market?

Jonty: Sure. So taking the example of Zhoushan, there was a launch of the Zhejiang Pilot Free-Trade Zone and the relaxation of blending restrictions within the zone in July last year. So these changes allowed locally registered companies to blend imported components to produce compliant bunker fuels, and also means that refiners within the free trade zone need not worry about the taxes that we mentioned earlier. Now, as well as this more competitive regulatory environment, Zhoushan now boasts 22 million cubic meters of storage, which is slightly more than there is in Singapore. Now, it's important to note that up to a third of this is strategic petroleum reserve, but there is another 10 million cubes that is currently under construction, meaning that there is more than enough storage and blending capacity to support the local bunker market. The Chinese government has been trying to promote its domestic ports with the hope of becoming a regional hub for sometime now, and this looks set to continue, with free-trade zones proposed in a number of coastal locations across as many as six new provinces. They've been doing this for several reasons, and perhaps, most importantly, the desire to have a more active role in the pricing of petroleum commodities across the region, which makes a great deal of sense, given that they are the largest consumer.

Sammy: I see. Very interesting, Jonty. It seems as though if the tax system is adjusted as expected, China is well-positioned to take a significant step forward in the bunker markets post-2020.

Jonty: Definitely. Now, that being said, what sort of initiatives is Argus working on in terms of bunker pricing in China and Asia, more generally?

Sammy: So Argus relaunched its bunker price assessments in June 2018 based on a new methodology. We started our bunker initiative in Singapore, given the size of the markets and the many bunker operations taking place here every day. The idea is to price bunkers based on prices obtained from dealer information received directly from market players such as shipowners, bunker suppliers, traders, and brokers. We then calculate a volume-weighted average of deals meeting our standard parameters for delivery and stem size. A cumulative total of 44 different companies have now contributed dealer information to Argus, and last month [October 2019], a daily average of over 23 deals have been used to calculate our Argus bunker indices in Singapore.

Argus was the first price reporting agency to launch a 0.5% LSFO price assessment in Singapore, last year. Our price assessment for that IMO 2020 compliant fuel is by far the most robust one in the market today as it is also calculated using a multitude of deals received each day by 7:00 p.m. The approach we took in Singapore is something we are now also employing in other ports across Asia. Namely, Fujairah as well as in the Chinese ports. In Fujairah, the world's third-largest bunker port, Argus is now also pricing bunkers on a volume-weighted average basis. About 10 deals every day, on average, are used to calculate prices.

This podcast, however, is obviously about China, and that is where Argus has made good progress as well in pricing bunkers. In April 2019, Argus signed an agreement with the Zhoushan City government to provide price transparency in the port of Zhoushan. Zhoushan is now China's largest bunker port, as you described, and it has built up an impressive logistical infrastructure and is trying to rival Singapore as a pre-eminent bunker hub in Asia. Our pricing team in China has been engaging with the market in Zhoushan as well as in other ports in China and in Hong Kong. Last month, this yielded an average of 11 deals every day in China, including Zhoushan. Low sulphur fuel oil has been trading in Zhoushan and China more actively because of the implementation of a 0.5 % sulphur limit along China's shores since the start of 2019. And Argus has been able to capture a significant part of the daily spot market for HSFO.

Jonty: Okay. Very interesting. So you've spoken mainly about the physical side of the market, is Argus also working on the paper side of things as well?

Sammy: Definitely, Jonty. So apart from providing the market with an accurate price for delivered bunker fuels in key ports in Asia, Argus has recently also been successful in working together with exchanges. CME, for example, listed our high sulphur fuel oil price in August this year. This will be a futures contract, and it will settle against the monthly average of Argus physical HSFO bunker spot assessment prices. Following the launch on CME, the Asia Pacific Exchange, or APEX, an exchange based in Singapore, listed our low sulphur fuel oil price on the 18th of October. More than 1,000 lots are now trading each day, and this is providing the market with forward price guidance. I'm also pleased to announce that the Singapore Exchange, or SGX, will also list our low sulphur fuel oil price on the 18th of November.

So, in summary, these are certainly interesting times, with the marine industry undergoing substantial changes that are unprecedented. Argus is providing the market with robust price assessments in key ports, including China, which can be used in physical procurement contracts, as well as being used as a settlement price on exchanges that allows the industry to hedge their physical exposure. With that being said, we are now concluding this episode. Jonty, thank you very much for your contribution. And thank you all for listening, and please look out for the next edition in our series of podcasts on China and the commodity markets. Goodbye. 

Related links

From crude oil to metals, Argus covers a wide range of global energy and commodity markets.

Transcript

Sammy: Welcome to another episode of our "China Connection" miniseries. The series examines China's rising presence in the global commodity markets. And this episode will focus on the impact of IMO 2020 on the global supply of bunker fuels and how China is developing into a key player with the development of the Zhoushan Hub. The "China Connection" is brought to you by Argus, a leading independent provider of energy and commodity price benchmarks. My name is Sammy Six, and I'm the deputy editor of Marine Fuels. I am responsible for the daily bunker price assessment in Singapore and other key ports in Asia.

Jonty: And I am Jonty Richardson, a senior analyst in our consulting department, covering crude and refined products with a specific focus on forecasting demand, supply, and prices, in relation to IMO 2020.

Sammy: Jonty, maybe a good place to start is for you to give us a brief introduction to IMO 2020.

Jonty: So, from the first of January next year, this new regulation will reduce the maximum sulphur content for marine fuels from 3.5% to 0.5% for all vessels that are not equipped with on board scrubbers. Given that investment in on board scrubbing has been relatively light so far, only around 15% of the 200 million ton of high-sulphur bunker market will remain in 2020. This has two key implications. Firstly, there will be a significant surplus of high sulphur fuel that we will need to price a point that makes it competitive in all sense of the markets, such as power generation. And secondly, demand for compliant marine fuels will replace up to 140 million tons of high sulphur fuel in 2020. Now, this will mean that high sulphur fuel oil is an even less desirable product for refiners to produce. While compliant, very low sulphur fuel oil will offer positive returns.

Sammy: Now, this podcast series has a specific focus on China. What is it that makes China well suited to being a big player in the bunker market?

Jonty: So, there are three key factors: traffic, robust infrastructure, and access to a source of marine fuels. To address the first point, six of the 10 largest container ports globally are in mainland China, with Shanghai and Ningbo-Zhoushan occupying the first and third spots on the list. This means that there is definitely sufficient traffic to support a robust, domestic bunker market in the area. Secondly, when it comes to storage, thanks to a swathe of local investment in recent years, a number of Chinese ports are now well-positioned to store and blend sufficient volumes. While, finally, China is home to the world's second-largest refining sector. So with more than 15 million barrels a day of primary processing capacity on its doorstep, it means it will definitely have access to sufficient fuels.

Sammy: With this in mind, where does China sit in the bunker market today?

Jonty: So, at the moment, it's a relatively small player. The country's largest bunker hub accounted for less than 4 million tons of bunker demand annually, and this is compared to a Singapore market, which was around 50 million tons last year.

Sammy: Now, why is it then that China makes up such a small proportion of the market, given the advantages that you just mentioned?

Jonty: Well, historically, taxes have acted as a barrier. Refiners that are outside free trade zones can't claim back consumption and value-added taxes for fuel in the same way that they can for high-value products such as diesel and gasoline. This means that domestically sourced fuels are just not cost-competitive in an international bunker market, which has required the import of close to 90% of the marine fuel sold annually.

Sammy: I see. And is this likely to change in 2020? What can be done in China to grow the market?

Jonty: Well, the most important thing would be for China's central government to waive the consumption tax on fuel oil, which equates to around $180 per ton, as well as offering rebates on the 13% VAT that's in place. This would allow refiners across the country to produce very low sulphur fuel oil at a competitive cost. Now, the legislative changes have been talked about for a while now and are expected prior to the January 1st deadline. But, at the moment, exactly when they will be announced is unclear. To a certain extent, this can be viewed as the last piece of the puzzle in unlocking China's potential for significant growth in the bunker market because China has already made significant strides to establish hubs such as Zhoushan.

Sammy: Can you tell us a little bit more about how China has tried to grow the domestic bunker market?

Jonty: Sure. So taking the example of Zhoushan, there was a launch of the Zhejiang Pilot Free-Trade Zone and the relaxation of blending restrictions within the zone in July last year. So these changes allowed locally registered companies to blend imported components to produce compliant bunker fuels, and also means that refiners within the free trade zone need not worry about the taxes that we mentioned earlier. Now, as well as this more competitive regulatory environment, Zhoushan now boasts 22 million cubic meters of storage, which is slightly more than there is in Singapore. Now, it's important to note that up to a third of this is strategic petroleum reserve, but there is another 10 million cubes that is currently under construction, meaning that there is more than enough storage and blending capacity to support the local bunker market. The Chinese government has been trying to promote its domestic ports with the hope of becoming a regional hub for sometime now, and this looks set to continue, with free-trade zones proposed in a number of coastal locations across as many as six new provinces. They've been doing this for several reasons, and perhaps, most importantly, the desire to have a more active role in the pricing of petroleum commodities across the region, which makes a great deal of sense, given that they are the largest consumer.

Sammy: I see. Very interesting, Jonty. It seems as though if the tax system is adjusted as expected, China is well-positioned to take a significant step forward in the bunker markets post-2020.

Jonty: Definitely. Now, that being said, what sort of initiatives is Argus working on in terms of bunker pricing in China and Asia, more generally?

Sammy: So Argus relaunched its bunker price assessments in June 2018 based on a new methodology. We started our bunker initiative in Singapore, given the size of the markets and the many bunker operations taking place here every day. The idea is to price bunkers based on prices obtained from dealer information received directly from market players such as shipowners, bunker suppliers, traders, and brokers. We then calculate a volume-weighted average of deals meeting our standard parameters for delivery and stem size. A cumulative total of 44 different companies have now contributed dealer information to Argus, and last month [October 2019], a daily average of over 23 deals have been used to calculate our Argus bunker indices in Singapore.

Argus was the first price reporting agency to launch a 0.5% LSFO price assessment in Singapore, last year. Our price assessment for that IMO 2020 compliant fuel is by far the most robust one in the market today as it is also calculated using a multitude of deals received each day by 7:00 p.m. The approach we took in Singapore is something we are now also employing in other ports across Asia. Namely, Fujairah as well as in the Chinese ports. In Fujairah, the world's third-largest bunker port, Argus is now also pricing bunkers on a volume-weighted average basis. About 10 deals every day, on average, are used to calculate prices.

This podcast, however, is obviously about China, and that is where Argus has made good progress as well in pricing bunkers. In April 2019, Argus signed an agreement with the Zhoushan City government to provide price transparency in the port of Zhoushan. Zhoushan is now China's largest bunker port, as you described, and it has built up an impressive logistical infrastructure and is trying to rival Singapore as a pre-eminent bunker hub in Asia. Our pricing team in China has been engaging with the market in Zhoushan as well as in other ports in China and in Hong Kong. Last month, this yielded an average of 11 deals every day in China, including Zhoushan. Low sulphur fuel oil has been trading in Zhoushan and China more actively because of the implementation of a 0.5 % sulphur limit along China's shores since the start of 2019. And Argus has been able to capture a significant part of the daily spot market for HSFO.

Jonty: Okay. Very interesting. So you've spoken mainly about the physical side of the market, is Argus also working on the paper side of things as well?

Sammy: Definitely, Jonty. So apart from providing the market with an accurate price for delivered bunker fuels in key ports in Asia, Argus has recently also been successful in working together with exchanges. CME, for example, listed our high sulphur fuel oil price in August this year. This will be a futures contract, and it will settle against the monthly average of Argus physical HSFO bunker spot assessment prices. Following the launch on CME, the Asia Pacific Exchange, or APEX, an exchange based in Singapore, listed our low sulphur fuel oil price on the 18th of October. More than 1,000 lots are now trading each day, and this is providing the market with forward price guidance. I'm also pleased to announce that the Singapore Exchange, or SGX, will also list our low sulphur fuel oil price on the 18th of November.

So, in summary, these are certainly interesting times, with the marine industry undergoing substantial changes that are unprecedented. Argus is providing the market with robust price assessments in key ports, including China, which can be used in physical procurement contracts, as well as being used as a settlement price on exchanges that allows the industry to hedge their physical exposure. With that being said, we are now concluding this episode. Jonty, thank you very much for your contribution. And thank you all for listening, and please look out for the next edition in our series of podcasts on China and the commodity markets. Goodbye.

Comments

Leave a reply

Required
Please fill in your name
The name is not correct (only letters allowed)

Related blog posts

12 November 2019

The China Connection: Plastics recycling challenges

Podcast: Nearly two years after China's ban on imports of plastic waste, what are the implications for plastic waste trade flows for the rest of the world?

Filter:

Asia-Pacific Petrochemicals English Europe North America

29 October 2019

The China Connection: The Belt and Road Initiative

Podcast: A deeper look into China's Belt and Road Initiative (BRI) and how Xi Jinping is positioning it globally, regionally and domestically.

Filter:

Asia-Pacific Crude oil LPG/NGL Natural gas/LNG Oil products Petrochemicals English North America

15 October 2019

The China Connection: Xi vs Trump

Podcast: Xi vs Trump. How have global and Chinese and US commodities markets shifted with each blow of the trade war?

Filter:

Asia-Pacific North America Crude oil LPG/NGL Natural gas/LNG Oil products Petrochemicals English