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Imports of fuel oil into China increased by approximately 0.52 million tonnes in February 2009 as stockpiles accumulated ahead of a fuel tax increase on January 1st are slowly drawn down, Reuters reports.

According to data released by the General Administration of Customs, fuel oil imports rose by 33 percent from 1.58 million tonnes in January to 2.1 million tonnes last month.

Demand from Asia's largest importer of fuel oil had slowed during the month of January following the buying rush ahead of a rise in consumption tax on fuel oil on January 1st from 0.10 yuan per litre to 0.70 yuan per litre.

The tax hike was part of the government's fuel pricing reform to promote energy efficiency and bring local fuel prices more in line with international price changes.

As a result of the tax increase, fuel oil imports skyrocketed 115.5 percent in December 2008 compared to the same month in 2007 as refiners and traders rushed to import the fuel ahead of the tax increase. With total fuel oil imports for December reaching 2.64 million tonnes, the figure was also 90 percent higher than in November 2008.

Despite the fact that January imports were 1.06 million down on the previous month, the figure was still 5.4 percent higher than a year ago.

Traders also expect a possible further improvement in fuel oil demand after April when current fuel oil stocks are depleted. However, overall demand may be tempered by the country's flagging economic growth.

Local "teapot" refineries, which use fuel oil as feedstock as they have limited access to crude oil, raised production rates towards the end of last year to meet the increased in demand from wholesalers, who were buying ahead of the consumption tax hike.

These refineries, which make up approximately 20 percent of China's total refining capcity, are located in the southern province of Guangdong, China's manufacturing hub, and in the eastern Shandong province. They usually import straight-run fuel oil to process into industrial grade diesel and low-octane gasoline.

The use of cheaper fuel oil feedstock enabled them to compete with the state-owned refineries when producing products for the domestic market. However, the raise in consumption tax is expected to have a serious impact on refining margins and could potentially lead to local "teapot" refineries being squeezed out of the market, according to market sources.

A recent decline in imports of 180-centistoke (cst) by Chinese teapots is said to have led to a narrowing price spread between 380-cst and 180-cst fuel oil cargoes. The spread is currently around $3.00 per tonne, after reaching a low of around $1.50 per tonne in mid-February.

Regional bunker sales have also dropped as shipping activity falls in line with a decrease in trade and manufacturing.

Some analysts believe, however, that China's fuel oil demand may return to normal levels by the end of June or early July as the build of inventory levels was over a relatively short period of time. Lower global energy prices are also expected to have a positive effect on spending power.