On June 22, LSFO futures were officially launched on Shanghai International Energy Exchange (INE). The listed contracts include LU2101, LU2102, LU2103, LU2104, LU2105 and LU2106, and the listed base price is RMB 2,368/mt.
The largest difference between the LSFO futures launched on INE and the fuel oil futures listed on Shanghai Futures Exchange (SHFE) is that the former one refers to the fuel oil with the sulphur content no more than 0.5%, while the latter one refers to 380 CST fuel oil whose sulphur content is 3.5%.
Due to the requirements of IMO 2020, China boosted its transition from high-sulphur fuel oil to low-sulphur fuel oil from 2019. Therefore, in 2020, the supply of high-sulphur 380CST in China dropped, and its co-movement with the market weakened. Accordingly, China decided to launch LSFO futures.
The global annual bunker consumption volume is around 250 million mt, and Asian-Pacific region is the global largest bunker consumption region with the proportion at around 40%. Therein, in 2019, the annual bunker consumption volume in Singapore reached 47.46 million mt.
With the influence of IMO 2020, the bunker consumption structure in Singapore experienced significant change. Before 2019, the consumption proportion of high-sulphur bunker was over 90%. However, from January to May 2020, the proportion of high-sulphur bunker dropped to 17.73%, while the proportion of low-sulphur bunker surged to 70.71%.
In China, from January to May 2020, the total output of low-sulphur bunker was 2.191 million mt. The low-sulphur bunker was produced by Sinopec, PetroChina, Sinochem, CNOOC and Zhejiang Petroleum and Chemical, and the major production technology was residue-to-low-sulphur bunker.
Currently, China’s low-sulphur bunker capacity is 19.15 million mt/a. Lately, MOFCOM issued 2020 1st batch of low-suphur bunker export quotas at 10 million mt. With the revival in bonded bunker demand in the future, China’s low-sulphur bunker output will increase further, and the market supply will be ample.
Meanwhile, China’s import volume of fuel oil declined significantly. According to the statistics released by the General Administration of Customs, from January to April 2020, China’s total fuel oil import volume was 4.7852 million mt, down 1.1702 million mt or 24.46% Y-O-Y. With the rise in China’s low-sulphur bunker output, China’s import dependence degree of bonded bunker kept dropping. Moreover, with the issuance of full value-added-tax rebate on fuel oil exports under general trade, the prices of China-origin bonded bunker declined sharply, supporting the growth in bonded bunker export volume. From January to April 2020, China’s total export volume of fuel oil was 4.1763 million mt, up 28.97% Y-O-Y.
Currently, low-sulphur bunker has become the major product in the bonded bunker market, and the launch of LSFO futures will promote the further development of bonded bunker market trade and help participants to reduce market risks. The price trend of bonded bunker in Zhoushan reveals bonded bunker market development in 2020. According to SCI’s statistics, from January to May 2020, the average price of LSFO was $387.93/mt, down $116.7/mt or 36.62% Y-O-Y. The peak price of this period appeared in H1 January at $730/mt, while the bottom price appeared in H2 April at $185/mt.
At the initial period of the LSFO futures launch, premium and discount between delivery warehouses in different regions will not be set, and in order to cut the cost at real-economic participants and help them to expand procurement and sales channels, the service charge of delivery will be free from June 22, 2020 to January 8, 2021.
The specified delivery warehouses of LSFO futures are Sinochem Xingzhong Petroleum Transshipment (Zhoushan), Yangshan Shengang International Petroleum Storage and Transportation, Zhejiang Offshore Oil Storage and Dading Oil Storage. INE will adjust the delivery storage capacity based on the future market development.
