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Chinese fuel oil demand in 2006 may find it difficult to recover from this year's slump on the back of high global oil prices and depressed refining margins by China's tight lid on auto fuel prices, industry sources say.
Demand for the heavy refinery product, of which China is Asia's top buyer, is also threatened by natural gas to fuel power stations as the country opens its first liquefied natural gas (LNG) import terminal in about nine months.
The International Energy Agency forecast daily fuel oil demand to rise 2.7 percent next year to 806,000 barrels, after a 5.4 percent fall in 2005, the first drop in three years, as key consumers — industries and small refineries that process it into motor fuels — were forced to shut down or cut output.
In Guangdong Province, China's manufacturing hub that accounts for half of the country's fuel oil needs, ceramics mills sent their workers home without pay as production halted.
Other plants, making everything from glass wares and, textiles to electronics, are shifting away from the sludge-like fuel that has appreciated some 60 percent in value over the past year.
“Factories could no longer bear the scorching fuel costs. Many are switching to cheaper substitutes,” said fuel oil trader Wu Jianchang from Guangzhou.
Official data showed China's fuel oil imports declined 16 percent to 470,000 barrels per day (bpd) in the first eight months, compared with last year's 30 percent rise. Fuel oil accounts for about 13 percent of China's total oil use.
While motorists and truck drivers were shielded from the global oil price rise by China's control on diesel and gasoline rates, fuel oil consumers in the world's No.2 energy user were hit hard as its price is market-driven.
“A rise in demand next year would require either softening oil prices or a change in domestic pricing,” said Yan Kefeng, Beijing-based analyst with Cambridge Energy Research Associates.
Import volumes dropped as dealers such as fuel oil trader Wu shifted from costly fuel oil imports to cheaper but poorer quality residue fuels produced by local refiners, or to low-heat liquids extracted from coal.
China's fuel oil output rose 12 percent to 410,000 bpd in the first nine months of this year as State refiners boosted runs.
“I am no longer dealing in imported 180-cst. I have to follow my customers,” he said, referring to the 180-centistoke fuel oil, the benchmark grade traded on the Asian spot market.
China is set to import Australian LNG, a super-cooled natural gas, from the middle of next year through a 3.7 million ton-per-year gas receiving project in Guangdong.
The cleaner fuel would replace at least two fuel oil-fired power plants in Guangdong, on top of feeding nearly 30,000 taxis and public buses, as well as supplying hundreds of thousands of families for cooking and heating.
Electricity plants in Guangdong, which burns nearly a third of China's total imported fuel oil, have kept high operating rates under the local government's guarantee of subsidies.
Many of China's tiny refineries, called teapots, which source its fuel oil mainly from South Korea, Russia and Singapore, have been forced to trim operations or shut down for most of the year.
More than 100 such plants in China, each with daily capacity of between 6,000 and 60,000 barrels and mostly run by private businesses, had been battered by poor margins due to Beijing's auto fuel price caps. This was despite the 15 percent rise in retail rates of diesel and gasoline.
These plants command a niche market of 10-15 percent of China's oil sector, selling lower-priced, inferior diesel to factories or independent petrol stations with lower quality standards.
A teapot manager from eastern Shandong Province estimated that a third of the teapot plants in his province had been shut.
“Business has never been so difficult. My plant was shut two-thirds of the time this year as my customers can't afford my product,” said Liang, a manager at a teapot plant in Guangdong.
(Shenzhen Daily October 24, 2005)
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