Fuel Oil Output Increases Steadily
By Ma Junrui

Import reduction

With the stable development of the economy, the demand of
energies in China has increased constantly. Owing to the rapid
increase of the crude oil processing amount and the brisk demand
in downstream sectors, the output of fuel oil reached 20.826
million tons in 2004, an increase of 3.88% over 2003. The import
amount reached 30.539 million tons, an increase of 28.37%. Fuel
oil had higher import dependence and became an oil product with
the largest import amount except crude oil.
   Compared with the situation of limited production growth,
drastic import increase and rapid apparent consumption growth
in 2004, the supply and demand of fuel oil changed greatly in
2005. The output had a higher growth, the import amount reduced
and the export amount increased considerably.
   The output of fuel oil in China was 22.612 million tons in
2005, an increase of 8.58% over 2004. The import dependence
started to reduce. The import amount was 26.013 million tons in
2005, a drop of 14.82% from 2004. The export amount was 2.2849
million tons, an increase of 26.94%. The apparent consumption
was 46.340 million tons, a drop of 6.51%.
   The drastic price rise of crude oil in the international
market in 2005 was an important factor for the fundamental change
in the fuel oil market. Due to the constant price rise of fuel
oil in the international market caused by the crude oil price,
importers could not bear the drastic profit shrinkage because
of the high cost and therefore cut down their import amount.
Domestic producers also used as much as possible domestic fuel
oil with relatively low price and even substitutes such as coal
tar. The demand of domestic fuel oil became strong. Besides, to
meet the increasing demand of oil products in the domestic market,
the crude oil processing amount also increased by 6.5% in 2005,
creating conditions for the output increase of fuel oil.

Considerable output growth in major producers

Commodity fuel oil varieties produced and supplied in the
domestic market mainly include ship fuel oil and heavy oil. Ship
fuel oil accounts for around 1.2% and heavy oil accounts for 82%.
The total output of fuel oil in the top 10 producers was 9.4148
million tons in 2005, an increase of 12.27% over 2004, and the
proportion in the national total also increased by 2.1
percentage points to reach 41.64%. The output of fuel oil in
Dalian West Pacific Petrochemical Company Ltd. reached 1.6418
million tons, an increase of 22.92%. The output of fuel oil in
Shandong Huaxing Petrochemical Group Company Ltd. was increased
by 31.82% to 1.3977 million tons.    

Fierce import market competition

The fuel oil import market in China had fierce competition in
2005. With the impact from the drastic price rise of fuel oil
and the contraction of bank credits, importers were faced with
great capital pressure. Many small dealers had to withdraw from
the market. Instead of shrinkage, the trade amount in large
dealers increased.
   The amount of fuel oil imported by China from Korea, Russia,
Singapore and the Middle East in 2005 was respectively 6.763
million tons, 5.202 million tons, 4.682 million tons and 3.121
million tons, accounting for 26%, 20%, 18% and 12% of the total.
The proportion of the amount imported from the Middle East was
around 5.0 percentage points higher than that in 2004. The
proportion of the amount imported from Singapore however dropped
by 11.0 percentage points.
   The import of fuel oil is mainly distributed in South China
and East China. The import amount in these two regions accounted
for 51% and 33% of the national total in 2005. The import amount
in other regions together accounted for 16% of the national
total.

Remarkable impact from the international market

Fuel oil is a downstream product of crude oil. Like most Asian
countries, the import of crude oil in China is mainly made from
the Middle East. Dubai crude oil is heavy crude oil with a
relatively high yield of fuel oil. As the crude oil price has
increased constantly in recent years and the improvement of the
world economy has promoted the demand growth of fuel oil, the
overall price of fuel oil in the international market keeps going
up.
   Fuel oil imported by China from the international market in
recent years takes the market price of fuel oil in Singapore as
benchmark price and the freight cost is then added. The factor
that produces the greatest impact on the import price is
therefore the market price in Singapore. With the constant
increase in the import amount of fuel oil in China in recent years,
the impact of the price in the international market on the
domestic market has also become more prominent. Guangdong
province is far away from crude oil producing areas. It lacks
fuel oil resources but owns many fuel oil power plants and
ceramic and construction material producers. Guangdong province
is therefore the largest consumption market and
gathering/dispatching place of fuel oil and its market price
represents the price trend in the domestic market. The price
growth of imported high-sulfur 180CST fuel oil of at Huangpu Port
reached 38.44% in 2005, an increase of 30.64 percentage points
over that in 2004.

Gradual demand drop

The nationwide power deficit starting from 2003 once led to a
demand growth of fuel oil. The power deficit in China reached
20 000 - 30 000MW in 2004, and the aggravated power deficit
directly brought about an oil consumption increase in power
generation. Industry also developed rapidly and there were
overheated investments in steel, textile and chemical fiber
sectors. The consumption of fuel oil in these sectors went up.
With the rapid development of the real estate sector, the
consumption of fuel oil in the construction material sector also
increased.
    The drastic price rise of crude oil and fuel oil in the
international market in 2005 was the external condition for the
domestic price rise. In the cost of imported fuel oil, the market
price rise in Singapore as a major variable will surely push the
import price up. As the price of imported fuel oil has been kept
at a high level for a long period of time, many producers can
hardly bear the high cost and therefore use as much as possible
substitutes with relatively low price, directly leading to a
demand reduction of fuel oil.
   The energy sector in China will develop rapidly and the demand
of fuel oil will experience considerable changes in the next few
years. The demand of fuel oil will increase with the development
of power, construction material and other sectors for a short
period of time. With the growing awareness in environmental
protection, however, substitute energies will play a more
important role and the demand of fuel oil will present a trend
of gradual decline.
   Due to problems in environmental protection, the consumption
of fuel oil in the United States and Europe has already reduced
gradually. With more stringent environmental protection
requirements, the consumption reduction of fuel oil will speed
up. Besides, the replacement of fuel oil is much easier than that
of crude oil. Either natural gas or coal can replace fuel oil
to some extent. The replacement of fuel oil by natural gas has
almost become a development trend in energy utilization