China Encourages Exports with Low-Sulfur Fuel Tax Benefits...Intensifying Competition in Ship Fuel Among Refining Industry

[Asia Economy Reporter Hwang Yoon-joo] As the Chinese government is reportedly about to announce a policy encouraging the export of Very Low Sulfur Fuel Oil (VLSFO), competition among refineries to secure eco-friendly marine fuel is expected to intensify. The domestic refining industry has been actively producing and marketing VLSFO even before the International Maritime Organization (IMO) environmental regulations took effect, aiming to secure market share.

According to the survey report "Current Status of the Chinese Bunker Fuel Market and Chinese Refiners' IMO Response Plans" released by the Korea Petroleum Association on the 14th, China will soon announce a tax refund plan for VLSFO exports.

Until now, shipping companies have used High Sulfur Fuel Oil (HSFO) with high sulfur content as fuel. However, with the IMO implementing regulations this year to reduce the sulfur content in marine fuels from the previous 3.5% to 0.5%, ships must use low sulfur fuel oil (LSFO), marine gas oil (MGO), or LNG with lower sulfur content.

The marine fuel oil market size is approximately 3.5 million barrels. Due to the IMO regulations, demand for HSFO is expected to decrease to 1.4 million barrels this year. Instead, the remaining demand is expected to be covered by LSFO (1 million barrels) and MGO (1.1 million barrels).

Chinese refiners produce marine gas oil (MGO), but their competitiveness in the international market has been relatively weak due to high consumption tax rates on diesel and limited export quotas. Especially in bonded zones (areas exempt from customs duties), Chinese products have been less competitive, but the industry expects competition with Chinese refiners to intensify going forward.

This is because Chinese state-owned refiners announced plans earlier this year to expand VLSFO production capacity to up to 20 million tons. The state-owned major refiners plan to increase production capacity to 18 million tons this year, 23 million tons in 2021, 25 million tons in 2022, and 30 million tons in 2023. The Chinese government's tax refund policy for VLSFO exports is interpreted as a measure to support the competitiveness of domestic refiners.

The domestic refining industry has been evaluated as having prepared best for LSFO production from an early stage. SK Innovation produces an average of 40,000 barrels per day of LSFO through its Vacuum Residue Desulfurization System (VRDS). Hyundai Oilbank was the first in the country to establish LSFO production facilities and aggressively markets the world's first eco-friendly marine fuel brand, "Hyundai Star." S-OIL and GS Caltex have also completed facility expansions and started sales.

The Korea Petroleum Association stated, "As LSFO production increases significantly in the future, the market share of Chinese state-owned refiners in the bunkering market is expected to rise," and added, "Blending companies (which mix fuels to produce LSFO) will face competition from Chinese state-owned refiners."

This content was produced with the assistance of AI translation services.