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China feels strains of growth I

The authorities considering five new licenses

f there is one thing most industry players and pundits agree on it is that the Chinese bunker market is growing in size. In the first half of this year, China clocked a staggering 20.8%

year-on-year increase in bonded, or tax-free, bunker sales to 4.66m tonnes, according to data from China-based analyst C1 Energy. As in other sectors, growth and challenges come

hand-in-hand. Chinese bonded bunker suppliers are starting to feel the strain from tougher market competition, while Beijing is taking steps to manage and sustain the expansion of the sector. China's bunkering industry is predicted to

continue expanding to more than 10m tonnes of bonded sales for 2011, supported by a market gradually opening up in terms of pricing and the number of suppliers. China sold more than 9m tonnes of bonded bunkers in 2010. Sales from six bonded bunker suppliers add up

the total. They are Chimbusco, Brightoil Petroleum, China Shipping & Sinopec Suppliers (Sinobunker), China Changjiang Bunker, Sinopec Zhejiang Zhoushan Petroleum, and CNPC & Tafo. Chimbusco had been the only bonded bunker supplier up until 2006 when China opened up the market and added the five companies as licensed players. As China witnesses greater demand for marine

fuels, the ministry of commerce is now considering applications from a further five local companies to sell tax-free bunkers. The five potential new entrants are state-run China Aviation Oil Import & Export, fuel trader China Arts Huahai Import & Export, Shanghai Longyer Fuels, Shanghai Fuel and Dalian Xingyuan Marine Fuel. The new licenses could be issued this year as

the government seeks to attract more businesses, supported by the country's rising container throughput volumes. The potential entry of more players has forced

the existing suppliers to up their game in offering lower bunker prices. The six suppliers are already engaged in an intense price war – good for the market on a whole to attract higher bunker demand, but bad for individual firms as margins are squeezed. With Beijing's policies crafted for the long-run

and leaning towards greater good over individual losses, suppliers have been stretching their resources to open up their bunkering services in more ports and have adopted a more flexible pricing strategy in their efforts to compete. Dominant player Chimbusco, most notably,

ditched its historic posted price system two years ago and opted to go spot at several key

bunkering ports including Shanghai, Dalian, Guangzhou and Shenzhen, setting the prelude to a commercially-driven industry. The posted price system is where prices are

indicated during the start of a working day and they may remain unchanged for a day or more. Spot or floating prices fluctuate throughout the day, adjusting to crude oil movements and market supply-demand. With more new players joining the market and

raising the competitiveness level, Chinese suppliers are finding it harder to operate based on posted price system. But China needs to do more. As a net

importer of fuel oil, China's bunker prices remain uncompetitive compared to regional neighbours, especially Singapore. With bunker bills easily accounting for 50% of a ship's operating costs, shipowners are really only interested in getting the best deal. Over the past six months, bunker prices at the

Chinese ports along the eastern coastline have at times dipped below that of Singapore, according to data from C1 Energy. “At present, China's eastern coastal ports'

prices on average command a premium of about $10 per metric tonne above Singapore prices. Back in 2010 or earlier, the premium had been $30 per metric tonne or more,” says Liao Na, information and operation director at C1 Energy. The downside of such a growth model based on

depressing prices, according to Liao, is the increasing strain on the margins of the suppliers. “Fundamentally China needs to ensure it can sustain cost advantages in sourcing for oil,” she says. A far-sighted political move by Beijing back in

2009 has allowed China to import substantially larger amounts of cheap fuel oil from Venezuela. This in turn will lend more leeway to Chinese suppliers in offering lower bunker prices. With cut-throat competition expected to

persist, China's bonded bunker suppliers certainly have to brace themselves for narrower margins and at the same time finding the resources to expand if they are to avoid losing out.

Seatrade Bunkering Report 2011 19 ‘

Fundamentally China needs to ensure it can sustain cost advantages in sourcing for oil.

Liao Na, C1 Energy ’

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