How China’s fishing ban is hitting profits for Asia’s diesel fuel traders

With a million fishermen idled in a moratorium aimed at protecting endangered species, demand for fuel is falling, pushing prices down

PUBLISHED : Wednesday, 07 June, 2017, 3:21pm
UPDATED : Wednesday, 07 June, 2017, 3:21pm

On top of stricter emission controls and a move toward electric vehicles, Asia’s diesel traders now have to worry about a million Chinese fishermen staying idle.

A Chinese move to protect endangered marine creatures such as the sea cucumber with a fishing ban contributed to a drop in the so-called crack spread in Asia for diesel, a measure of returns from producing the fuel, to a nine-month low. That is because thousands of the country’s fishing trawlers that will be idle between May and September will not require the fuel at a time when supplies are usually ample as refineries return from maintenance work.

This is not the first time the traders have been rattled by policy changes in China, the world’s biggest energy consumer. The country raised its fuel standards for vehicles in January, leading its refiners to boost premium diesel production, in turn reducing the price spread between cleaner and dirtier grades in Asia.

The fishing ban, slower economic growth, and a move away from heavy industries in the nation could cloud the outlook for the fuel further, according to Fitch Group’s BMI Research.

“A nationwide fishing ban imposed in May will further hit diesel consumption by China’s sizeable boat fleet,” BMI said in a May 25 report. “With the Chinese economy set to slow down further in the second half of 2017, demand for refined fuels could see added pressure in the coming months.”

Overfishing coupled with rising demand for seafood have exhausted fish resources in China’s major rivers and seas, said Liu Xiaoqiang, an official at the Ministry of Agriculture’s fishery department. Among those in need of protection are the sea cucumber, hairtail and yellow croaker. Sea cucumbers, a revered luxury food item, have been harvested at an unsustainable rate, according to WorldFish, a non-profit research organisation.

China introduced the fishing ban on all four of its main seas on May 1, the first time it has synchronised dates for the moratorium for all offshore fishing. The ban ends between August and September and is about a month longer than previous prohibitions, affecting almost 200,000 fishing boats and one million fishermen, according to the agriculture ministry.

That has weakened the price of diesel, typically the fuel of choice for fishing boats, according to five traders and an analyst surveyed by Bloomberg. It also sent the crack spread for diesel in early May to its lowest level since August 2016. It was near US$10 a barrel on Tuesday.

“Fishing activity in China certainly affects domestic diesel demand,” said WengInn Chin, an oil market analyst with industry consultant FGE, adding the ban had contributed to some pressure on the crack.

Still, some analysts said that China’s fishing boat demand was not big enough to significantly affect prices of diesel. It only accounts for about 2-3 per cent of total consumption of the fuel, according to Jean Zou, an oil analyst with ICIS-China.

More importantly, refineries are coming back online following routine maintenance shutdowns, while China’s vehicle fleets are moving away from gas oil to alternative-fuel vehicles and electric cars.

“While the fishing ban might have a short-term impact on Chinese diesel demand, we see transport and other industry developments as being also highly relevant,” said Andrada Irimie, an analyst at JBC Energy, a consultant in Vienna. “However, pressure is likely to stem from the supply side. As Chinese crude intake is seen rising over the coming months, we expect Chinese diesel supply to trend higher, resulting in a stronger export potential.”