MOSCOW (MRC) -- Asia’s oil refiners are starting to see a surge in demand for cleaner fuels that is pushing up processing profits for very low sulfur fuel oil (VLSFO) and gasoil just weeks before new rules take effect for fuel products burned in ships, reported Reuters.
Most ships have to switch from high-sulfur fuel oil (HSFO) to cleaner fuels such as VLSFO and marine gasoil (MGO) when new sulfur emissions rules set by the International Maritime Organization (IMO), known as IMO 2020, start on Jan. 1.
Ships will have to use fuels containing not more than 0.5% sulfur, compared with 3.5% now, unless they are equipped with exhaust-cleaning "scrubbers".
The oil industry stocked up on IMO-compliant fuel, expecting high demand and a big boost in profits ahead of the rules taking effect, but ship owners kept their purchases to a minimum until this month, delaying a run-up in demand that refiners had expected earlier in the fourth quarter.
"Although the improvement (in margins) would not offset (overall) concerns in the fourth quarter, it could be a silver lining. It gives a stronger positive sign for next year," said a spokesman from SK Innovation, owner of South Korea’s top refiner SK Energy.
Refining margins or cracks for VLSFO rose above USD20 a barrel this month, while cracks for gasoil with a sulfur content of 10 parts per million (ppm) for January delivery were about USD1 higher than those for December, encouraging refiners such as South Korea’s Hyundai Oilbank to increase output in January.
A Singapore-based marine fuels trader estimated that VLSFO supplies may be enough to meet only half to 70% of the near-term demand, based on sales of about 8 million to 9 million tonnes of marine fuels in Asia and the Middle East per month.
The shortfall would have to be filled in with marine gasoil, boosting refiner profits for both fuels, the trader said.
Besides slower-than-expected demand for IMO-compliant fuels, weak domestic demand for gasoil in India and China pushed up export volumes, battering the fuel’s margins, which have shed 18% over the past couple of months.
But gasoil profits could rebound to about USD20 a barrel in the next few months as more ships switch to MGO and as simple refineries cut output on low HSFO margins, according to Goldman Sachs and energy consultancy FGE.
"Despite the ample availability of VLSFO, we still expect MGO demand to receive support in the coming weeks, when more vessels start switching to use compliant fuels," said Sri Paravaikkarasu, FGE’s director for Asia oil.
The new demand from ships could boost gasoil consumption by 1 million to 1.35 million barrels per day next year, according to Wood Mackenzie and Energy Aspects.
As MRC wrote previously, South Korea’s leading LPG supplier SK Gas Ltd. (part of SK Corporation) will spend KRW 2.02 trillion (~ USD 1.8 billion) to build a combined-cycle power plant and polypropylene (PP) plant in the southeastern industrial city of Ulsan, South Korea. The project will help provide stable electricity to Ulsan, one of Korea’s largest industrial clusters for automotive, shipbuilding and petrochemical industries. The port city is also home to SK Gas' LPG storage terminals, which are the world’s largest rock cavern storage facilities with a combined capacity of 270,000 tons. The company said it expects the new plants to play a central role in bolstering its gas chemical business. The PP manufacturing unit, with a projected capacity of 400,000 t/y, is to be set up in the nearby Yongyeon-dong area on a site of 150,000 square meters.
According to MRC's ScanPlast report, the estimated PP consumption in the Russian market in January-October 2019 totalled 1,066,520 tonnes, up by 7% year on year. Supply of block copolymers of propylene (PP block copolymer) and homopolymer of propylene (homopolymer PP) increased, demand for statistical copolymers (PP random copolymer) decreased.
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