Insight from Shanghai

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The International Maritime Organization’s new emissions regulations are ushering in a reorganization of refining and bunkering across the globe. Could China emerge as a winner by ramping up production of compliant fuels and attracting more vessels to its ports?

China is one of the world’s largest importers of energy and raw materials, and its ports handle nearly a third of global container traffic. Little wonder then, that in terms of the number of ships owned, China has the largest merchant fleet in the world.

Given the size of its fleet and the number of ships that pass through its ports, China plays a surprisingly small role in bonded bunkering – the provision of fuel sold tax-free to ships travelling between countries across international waters.

It is not China but Singapore that dominates Asian bunkering. Just under 50 million mt of bunker fuel were sold in Singapore last year, making it the world’s largest bunkering hub. No other port comes close. Rotterdam and Fujairah, the world’s second- and third- largest bunker ports, each sold under 10 million mt last year. In comparison, China’s total bunker fuel demand is about 12 million mt/year across all its ports.

Most of the world’s shipping fleet runs on high sulfur fuel oil – a cheap, dirty byproduct of the refining process. Asian refineries’ output of HSFO is not enough to meet regional demand. S&P Global Platts Analytics estimates that Singapore imported nearly 90% of its bunker fuel in 2018 with just under two thirds coming from outside the region. In the first three months of 2019 just under a quarter of Singapore’s imports came from Russia, and just over a quarter from Europe and the Americas, with the remainder being supplied by the Middle East and other parts of Asia.

The key to Singapore’s dominance of Asian bunker markets is its huge commercial storage capacity and fuel blending capabilities. This allows it to take in arbitrage cargoes of different qualities from across the globe and blend them to meet requirements for end users throughout Asia.

Because of its pivotal role suppling the region, Singapore is also the Asian price benchmark for bunker fuel. The pricing for cargoes sold to Chinese importers is typically based on S&P Global Platts Singapore benchmarks. Imports make up around 90% of China’s bonded bunker fuel supply, with Singapore and Malaysia being the main supply sources.

But could IMO 2020 – technically the implementationof Annex VI of MARPOL, a global protocol to reduce pollution from ships – erode Singapore’s bunkering dominance? Could it see a Chinese port, or ports, rise to become a rival bunkering center, and even challenge Singapore‘s status as the regional benchmark?

IMO 2020 will limit maximum sulfur content in marine fuels to 0.5% from 3.5%, effective January 1, 2020. This will require all ships to either use fuel that meets the new sulfur cap, or to install scrubbers to reduce emissions if they continue using HSFO.

So far, only a few shipowners have been willing to commit the considerable capital investment required to install scrubbers. Platts Analytics estimates that scrubbers will only be able to scrub 13-15% of global bunker demand by January 2020, meaning most ships will have to use 0.5% sulfur marine fuel when the protocol comes into effect.

Singapore’s storage infrastructure makes it well placed to be a blending hub for IMO compliant fuels. Indeed, the price of 0.5% sulfur marine fuel in Singapore has risen considerably this year, driven by stockpiling of low sulfur fuel oil components.

By the middle of August, 0.5% sulfur marine fuel was fetching a $105/mt premium to Platts 380 CST high sulfur fuel oil, up from $40/mt on January 2, 2019 when Platts started assessing cargoes of IMO- compliant bunker fuels.

But IMO 2020 also presents an opportunity for Asia’s largest refiners, notably those in China. The country is second only to the US in terms of refining capacity, much of which is equipped with secondary processing units capable of producing low-sulfur products from high-sulfur crude.

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