Supply and Demand for Fuel Oil in China

By Wang Haibo, Sinopec Fuel Oil Sales Co., Ltd.

1. Consumption

Fuel oil features moderate viscosity, good fluidity, excellent atomization, high heat value, complete combustion, large heating power and small corrosion. It has therefore gained extensive applications in the sectors of oil processing, chemicals, transportation, construction, power generation and heat supply.
The consumption of fuel oil in China has declined overall in the past ten years. Due to substitutes for fuel oil in the power generation and heat supply sectors the consumption of fuel oil fell constantly after 2005 at an average annual rate of 2.0%. The apparent consumption of fuel oil slid from 42.24 million tons to 33.84 million tons during 2005-2014. Pushed by the large-scale construction of local oil refining enterprises with fuel oil as the major raw material, the consumption of fuel oil is basically stable in recent years. The average annual consumption of fuel oil has been around 37.0 million tons since 2010. See Figure 1 for details.
The consumption of fuel oil in China is mainly in the sectors of bunker oil, oil processing raw materials, chemicals, construction materials, power generation and heat supply. As the power generation and heat supply sectors vigorously promote substitutes for fuel oil, the consumption of fuel oil in these sectors already slid drastically from 11.40 million tons to 2.25 million tons during 2005-2012, and the proportion in the total fuel oil consumption was down from 26.9% to 0.6%. A further drop is expected in the future. With the rapid development of the coastal shipping sector and especially the brisk demand for fuel oil in bonded bunker oil, however, the transportation and storage sector becomes the biggest client of fuel oil, and the proportion in the total fuel oil consumption rose from 29.7% in 2005 to 37.6% in 2012. There is also a high demand for fuel oil in the oil processing, coking and nuclear fuel processing sectors, and the proportion in the total fuel oil consumption increased from 8.9% to 35.5% in that period. See Figure 2 for details.













2. Supply

The crude oil processing amount in China increased from 295 million tons in 2005 to 503 million tons in 2014 with an average annual growth of 6.1%. The output of fuel oil rose from 17.67 million tons in 2011 to 25.42 million tons in 2013 with an average annual growth of 4.1%. See Figure 3 for details. The yield of fuel oil was however down from 6.0% to 5.1% in that period.
The net import amount of fuel oil in China dropped steadily overall during 2005-2014. The import volume fell slowly whereas the export volume grew rapidly. See Figure 4 for details. The net import volume of fuel oil dropped from 24.56 million tons to 8.42 million tons in that period. The import volume slid from 28.84 million tons in 2005 to 17.83 million tons in 2014. The export volume rose from 4.28 million tons in 2005 to 11.64 million tons in 2013, with a slight reduction to 9.40 million tons in 2014.
Sources for the import of fuel oil to China have been quite stable since 2010. They are mainly concentrated in Venezuela, Russia, Singapore, Malaysia and Korea. The amount of fuel oil imported from these five sources in 2014 accounted for 86.6% of the total import amount. The amount of fuel oil imported from Venezuela and Singapore was basically maintained at 4.0-5.0 million tons a year. The amount of fuel oil imported from Korea, Malaysia and Russia declined. The amount of fuel oil imported from Russia, in particular, dropped somewhat from 7.86 million tons in 2012 to 2.71 million tons in 2014. The main reason was that there was less demand for Russian M100 fuel oil in local oil refining enterprises. The amount of fuel oil imported from the Middle East has increased in recent years, and in 2013, in particular, the amount imported reached 2.67 million tons. With the completion of new and expanded refineries in the Middle East, that region will become one of the important sources for the import of fuel oil to China. See Table 1 for details.

3. Forecast

3.1 Forecast of supply

China made two upward adjustments to the excise tax for fuel oil at the end of 2014. The excise tax was increased from RMB0.8/L to RMB1.1/L. The high excise tax will inhibit the yield of fuel oil in refineries. For the consideration of economic benefits, refineries prefer to process fuel oil into oil products or chemicals with higher added value. The output of fuel oil in China is therefore expected to decline in the future.
Refineries in foreign countries are undergoing a megatrend of expansion, renovation and upgrading. Their output of fuel oil will basically be stable, but the supply mix will change. The supply of Russian M100 fuel oil will decline further. It is expected that the amount of Russian M100 fuel oil for one-year contracts will be down from 5.0 million tons in 2014 to 2.8 million tons. Moreover, Russia has made constant upward adjustments to its oil export tariff. Most state-owned refineries in Russia will therefore reduce the direct export of fuel oil and shift to selling fuel oil as bonded bunker oil in the domestic market. The supply of heavy fuel oil from Venezuela will still be abundant. With the completion of new or expanded refineries in Indonesia and Saudi Arabia, these two countries will have partial fuel oil for export.

3.2 Forecast of demand

(1) Forecast of the demand for fuel oil as bunker oil
The throughput of cargo in major seaports of China increased rapidly from 2.93 billion tons in 2005 to 7.28 billion tons in 2014, with an average annual growth of 12.1%. The development of the ocean shipping sector has boosted the consumption of bunker oil. The consumption of bunker oil increased from 8.91 million tons to 16.90 million tons during 2005-2012 (around 2.20 million tons of 4# fuel oil and light fuel oil excluded) with an average annual growth of 9.6%.
With the lift of geographical restrictions on bonded bunker oil in 2009, the growth of bonded bunker oil has become a new bright spot. Various suppliers lose no time to occupy markets and competition is increasingly fierce. The consumption of bonded bunker oil in China increased from 2.0 million tons in 2005 to 9.5 million tons in 2012 with an average annual growth of 24.9% and accounting for 56% of the total bunker oil consumption. As the bunker oil market, the bonded bunker oil market in particular, is not affected by the excise tax and also has strong linkage to the international oil price, it has attracted more and more enterprises to participate. It has already become an inevitable trend for China to open the bonded bunker oil market. Quite a few seaports such as Shenzhen, Shanghai and Tianjin will hopefully establish bonded bunker oil supply centers, each with a supply capacity of over 5.0 million t/a. As some sectors will further shift their operations from coastal advanced areas to inland low-cost areas, river transportation will also develop rapidly. Bunker oil will present a steady rising trend in both internal trade and bonded bunker refilling.

Table 1   Sources for the import of fuel oil to China, 2010-2014  (kt)

Source    2010    2011    2012    2013    2014
Venezuela    4 218    5 016    4 766    3 849    4 532
Singapore    4 327    4 898    4 403    4 150    4 248
Russia    3 558    5 778    7 858    5 487    2 708
Malaysia    4 125    3 566    2 488    2 028    2 454
Korea    2 460    3 337    3 364    2 256    1 495
Middle East    339    598    112    2 666    879
Japan    1 054    1 115    745    704    466
Indonesia    1 000    278    1 030    934    273
Others    1 933    2 164    2 042    1 393    771
Total    23 014    26 750    26 808    23 467    17 826

(2) Forecast of the demand for fuel oil in oil processing
The crude oil primary processing capacity in China exceeded 750 million t/a in 2014. The crude oil primary processing capacity in local oil refining enterprises except PetroChina, Sinopec and CNOOC reached 270 million t/a, accounting for 35.9% of the national total. Fuel oil will still be an important raw material source. The accelerated quality upgrade of vehicle-use gasoline/diesel will affect the demand of fuel oil as raw material in local oil refining enterprises. It is expected that the demand for fuel oil in local oil refining enterprises will increase further along with the growth of the crude oil processing volume, but the proportion of fuel oil in raw materials will come down.
(3) Forecast of the demand for fuel oil for industrial uses
With the dual pressures of high cost and environmental protection, terminal users of fuel oil for industrial uses will gradually substitute petroleum tar, coal and natural gas. The demand for fuel oil for industrial uses will still decline in the future. The demand for blended 180CST fuel oil in the food, dressmaking and tobacco sectors and some light industry sectors using small boilers will however remain stable. The rigid demand in high-end clients such as high-tech materials, coatings and precision instruments will likely back the demand for fuel oil for use in boilers. In contrast to the declining demand for fuel oil for use in large boilers, small boilers will likely become an important pillar in the boiler fuel oil market.