Can Chinese refiners capitalise on IMO 2020?
This paper will analyse the impact of the IMO low sulphur fuel cap, which comes into effect on 1 January 2020, on China’s refining industry, including Chinese refiners’ ability to absorb high sulphur fuel oil (HSFO) and produce IMO-compliant bunkering fuels. The new IMO regulations aim to cut the sulphur content of marine bunker fuels from 3.5 per cent currently to 0.5 per cent in January 2020, but since China has already introduced tighter sulphur specs in Emissions Control Areas (ECAs) along its coastline, the transition is unlikely to present a big shock to the domestic refining industry. But can it become an opportunity for refiners to export products, and will it allow China to rival Singapore as a regional bunkering hub? Indeed, Chinese refiners seem well placed to take advantage of the looming shift given that domestic bunkering demand in China is already transitioning away from high sulphur fuel oil (HSFO) to marine gasoil (MGO). In addition, in light of China’s rising supply of refined products, alongside slowing demand growth, it has ample oversupply to export. Yet Chinese refiners’ exports are limited by state-set quotas which limit outflows. Moreover, as Chinese refiners and blenders are unable to claim back consumption and value-added taxes on domestic fuel sold as bonded bunkers, they remain at a significant cost disadvantage. The government is expected to announce tax rebates on low sulphur marine fuels, which should allow exports to rise. At the same time, the Chinese majors are planning to increase production of low-sulphur fuel oil (LSFO) to deliver to newly created free trade zones. Finally, the paper will assess the extent to which China’s independent refiners can become once more a sink for excess HSFO.