From January 19 to 23, 2021, the first cross-border take-delivery of low sulfur fuel oil (LSFO) futures, a product listed on the Shanghai International Energy Exchange (INE), ended in success, with a total of 3,500 metric tons of LSFO being withdrawn through an overseas commodity storage facility run by PetroChina International (Singapore) Pte. Ltd. under INE’s group delivery framework. This signifies that INE’s innovative design of “domestic delivery + overseas take-delivery” was for the first time put into practice.
The rules supporting the overseas take-delivery of LSFO futures have attracted widespread attention since their release on December 14, 2020, as market participants promptly made preparations for overseas take-delivery. PetroChina International (Zhejiang) Co., Ltd., a factory warehouse for LSFO futures, created the standard warrants for 3,800 metric tons of LSFO on December 23, 2020. Then starting from December 24, PetroChina International Co., Ltd., the group delivery center, began publishing reference premiums and discounts for overseas take-delivery of the next 15-30 days on a daily basis on INE’s official website, which were 15 yuan/metric ton, 20 yuan/metric ton, and 10 yuan/metric ton in sequence. Based on this and other information, three overseas market participants—Trafigura Group (Singapore) Pte. Ltd. (“Trafigura Singapore”), Freepoint Commodities Singapore Pte. Ltd. (“Freepoint Singapore”), and China-Base Resource Singapore Pte. Ltd. (“CB Singapore”)—reached an agreement with the Singapore-based factory and commodity storage facility on the arrangement for cross-border delivery, which was due to start after the first delivery of the LU2101 contract.
From December 25 to 31, 2020, LU2101, the first LSFO futures contract listed, completed its first physical delivery with a total delivery volume of 46,600 metric tons and a total delivery value of RMB 116 million yuan. Out of this total, 29,400 metric tons have already been consumed as bonded fuel in international shipping. This delivery involved 22 domestic and overseas industrial companies including Sinopec Zhejiang Zhoushan Petroleum Co., Ltd., Zhejiang Petroleum Trading Co., Ltd., Zhejiang Yongan State Energy Co., Ltd., Honors Bung Industrial Co. Ltd., Macquarie Investment Consulting (Shanghai) Co., Ltd., Rich Fortune International Industrial Ltd., and Honors Commodity Singapore Pte. Ltd.
As buyers of the LU2101 contract, Trafigura Singapore, Freepoint Singapore, and CB Singapore received the factory-issued standard warrants for 3,500 metric tons of LSFO. They then transferred those warrants to the factory at LU2102’s settlement price as on January 4 and entered into take-delivery contracts with the overseas commodity storage facility at the corresponding price. This cross-border delivery was completed without added premium or discount. The 1,000 metric tons of LSFO purchased by Freepoint Singapore have since been sold to Pertamina, to be supplied to the bunker fuel market after being pooled with other stocks at the Sambu Island (Pulau Sambu) south of the Singapore Strait. The 1,500 metric tons, held by Trafigura Singapore, will be directly supplied to international vessels as bonded fuel. The remaining 1,000 metric tons purchased by CB Singapore has been sold to Equatorial Marine Fuel Management Services Pte. Ltd., a Singapore-based bunkering company.
It’s believed that the first physical delivery and cross-border take-delivery of LSFO show that domestic and overseas market participants are recognizing its pricing capacity and are tapping into the functions of this product. Recently introduced customs policies—including those allowing storage tanks to function as both a bonded depot and export-supervised depot and export-bound oil to be directly fueled into ocean-going ships—made the “domestic delivery + overseas take-delivery” model for LSFO futures a reality. The rules and processes governing such activities, which represent the substantial opening-up of China’s futures market, help complete the full business cycle of LSFO futures and lay the foundation for its continued dynamism and growth. Furthermore, the fact that the “Shanghai price”-benchmarked LSFO can be redistributed and used for global bunkering in such a short time following its first delivery and cross-border take-delivery, reflects the capacity and efficiency of the futures market in serving the global supply chain.
According to an INE spokesperson, INE will ride on the success of Chinese futures market’s first attempt at overseas take-delivery, continue to recognize other qualified companies as factory warehouses under the group delivery framework, unlock more possibilities for overseas take-delivery, and promote its wider use in and for the real economy. After INE gains more experience with overseas take-delivery and Shanghai price-benchmarked transactions, it will expand the practice to TSR 20, bonded copper, and other products opened to overseas investors. Lastly, leveraging the “domestic delivery + overseas take-delivery” model, INE will accelerate its product and service development—be they for domestic or international investors, futures or spot markets, online or offline—to enhance the futures market’s role in resource allocation.