Expert: China launches low-sulfur fuel oil futures for pricing power
China began the trading of low-sulfur fuel oil futures on the Shanghai International Energy Exchange (INE) on Monday, opening its market to foreign investors in a bid to raise its pricing power in the global market, an industry insider said.
The pricing center for low-sulfur fuel oil has not yet formed in the international market. China's policy on export tax rebate may help the country become the largest producer of the fuel oil and help it gain more influence on the pricing, Qin Zhigang, deputy general manager of China Maritime Bunker Co., Ltd, the country's leading bunker fuel supplier holding nearly 50 percent of the market share, was quoted (in Chinese) by Shanghai Securities News as saying.
Low-sulfur fuel oil is an important fuel for maritime transport. The fuel oil futures contract is China's second bonded oil futures after crude oil futures contract was launched in March 2018 on the INE, a subsidiary of the Shanghai Futures Exchange (SHFE).
The yuan-denominated contract is also China's latest derivative commodity product open to foreign investors who can pay deposits in U.S. dollars in trading. It will allow overseas investors to access price signals, manage risks and advance a steady operation of the sector.
The first day of trading saw contracts for monthly deliveries from January to June 2021 with a benchmark price of 2,368 yuan (334.6 U.S. dollars) per ton. As of 11:30 Beijing time, the price for January 2021 contract reported at 2,617 yuan (369.8 U.S. dollars) per ton, up 10.5 percent.
"The contract will help expand China's pricing influence in global bunker fuel oil market and help China to improve its maritime transportation capacity," Jiang Yan, chairman of the SHFE told Reuters last July.
He added that "China may reverse the current situation of fully relying on imports on high-sulfur bunker fuel oil and become the world's biggest low-sulfur heavy bunker fuel oil supply center," as the fuel oil market saw bigger opportunities and challenges in 2020.
The International Maritime Organization set a new rule that only 0.5-percent or lower sulfur fuel oil should be used on ships. The new rule came into effect from January 1, 2020. The rule requires cleaner fuel for shipping and thus caused major disruption in the industry.
Chinese refiners have ramped up production of low-sulfur fuel oil in response to the shipping regulation change, and Beijing on February 1 approved a tax rebate for domestically produced fuel oil supplied to bonded storage.
China's top four state-owned refiners including Sinopec, PetroChina, CNOOC and Sinochem plan to boost total output of low sulfur fuel oil to 18.15 million tons per year in 2020. Sinopec said in March that its Guangzhou refinery is able to produce very low-sulfur fuel oil for the marine fuels.
The major fuel oil suppliers are based in the Middle East, South America, Russia and China. The global annual output is about 500 million tons, of which about 300 million to 400 million tons are traded on the open market.
The global consumption of ship fuel oil has reached 280 million tons in recent years, of which the Asia-Pacific market has grown rapidly, accounting for more than 45 percent, and has become the world's largest ship fuel oil consumption market.
The contract could further China's ambition to build a regional bunkering hub in Zhoushan port to vie for the multibillion-dollar ship fuel market dominated by Singapore, whose consumption of ship fuel oil was about 47.46 million tons in 2019.