China feasts on obscure oil to dodge taxman amid demand gain

Beijing

A FLOTILLA of tankers plying the waters between China and South Korea has been hauling unusually large volumes of a lesser-known fuel called light-cycle oil - or LCO - to Asia's biggest crude consumer.

Almost 800,000 tons of LCO arrived in China from its neighbour in July, the most in at least three years and more than twice the monthly average in the first half, data intelligence firm Kpler said. The flurry of activity is being driven by both pull and push factors for LCO, a low-quality petroleum product that's blended into diesel and fuel oil. South Korean LCO exports to China are estimated at 547,000 tons so far this month, according to Kpler, compared with an average of about 390,000 tons in the first six months of the year.

Chinese diesel demand recovered as the economy emerged from virus lockdowns and the interest in Korean LCO was heightened as it was cheaper than locally-produced fuels that weren't allowed to drop below the equivalent of US$40-a-barrel crude due to government policy. A tax loophole that exempts imported LCO from hefty duties on finished fuels, on the grounds that it's also a petrochemical feedstock, also added to its allure.

South Korean refiners, meanwhile, opted to produce more LCO as margins were better than for other fuels in July, said several traders who asked not to be identified as they're not authorised to speak publicly.

"Chinese refiners are riding on the arbitrage to import light-cycle oil for blending to gasoil and selling it into the domestic market with a margin uplift," said Serena Huang, a senior analyst at market analytics firm Vortexa Ltd. "This comes as a delight for South Korea refiners, who are getting higher margins in selling light cycle oil to Chinese refiners than exporting gasoil in the regional market." BLOOMBERG