Chinaโs response to the Iran war has put a question mark over future supplies for the local aviation sector as spiralling prices cripple spot markets and cloud planning for airlines.
โEveryone is concerned about their access to fuel… everyone holding is on to fuel and trying to get it,โ said Malcolm Roberts, head of the Australian Institute of Petroleum (AIP). โWeโre watching sources of supplies all across the region.โ
โAnd weโre watching China because theyโre a predominate supplier of jet fuels.โ
China, Australiaโs largest single supplier of jet fuel, last week began restricting its fuel exports, in part because of disruptions of supply from the Middle East resulting from the US and Israeli war against Iran.
The move means that countries such as Australia that rely on Chinese jet fuel โhave to scramble for replacement cargoes from South Korea, Singapore, Malaysia, India, all chasing supply in the same shrinking pool,โ according to Dan Wang, director of Eurasia Groupโs China team.
โInflation pressure is high, which could feed through into reduced flight frequencies and a hit to crossborder tourism,โ said Wang.
Australia uses about 10 billion litres of jet fuel a year, with more than 80 per cent of it imported, according to the AIP. The country gets about 2.6 billion litres a year, or 32 per cent, from China, with another 1.8 billion or 23 per cent from Singapore. South Korea supplies 1.4 billion litres a year, or 18 per cent. Other sources include Malaysia, Taiwan, India.
Domestically, refineries in Queensland and Geelong make about 20 per cent of the nationโs jet fuel.
โWe still can secure contracted supply,โ said the AIPโs Roberts. This month, 18 tankers have arrived, with 33 more to come and so far, no members of his organisation have reported that contracts were not being fulfilled.
The problem is what happens next. โWeโre exposed to those prices in the global market,โ he said.
The past fortnight has been a stark reminder of โhow fragile our global systems are, and what an interconnected world we live in,โ Infrastructure Minister Catherine King told a Melbourne audience on Wednesday. โWe are seeing the hourly impact on Gulf nations and its impact being felt across the globe.โ
In the past week, airlines including Scandinaviaโs SAS and Air New Zealand announced thousands of flight cancellations, citing the fuel price crunch. While Australiaโs government has moved to ease fears for motorists and truckers, the aviation sector remains under pressure to source jet fuel for the months ahead.
Airlines typically purchase jet fuel on forward contracts, locking in prices, or on the spot market to buy more fuel as needed. Chinaโs restrictions, aimed at ensuring its own domestic supply, effectively dry up that spot market, putting much more cost uncertainty on the agenda.
Australia is not directly dependent on Middle East oil, but it is indirectly exposed, as oil from Saudi Arabia is refined in China and Singapore.
For now, the country is 21 per cent ahead of the government-mandated minimum stockholding obligation for jet fuel, with more than 800 million litres, or the equivalent to 29 daysโ worth of jet fuel.
Fuel supply routes between Sydney Airport, which accounts for 40 per cent of the nationโs jet fuel consumption, and Singapore remain open and there are no supply chain disruptions expected for at least the next six weeks.
A price shock is, however, in the pipeline.
Singapore jet fuel has risen from about $US92 a barrel at the end of February to as high as $220 when the conflict began at the start of March. It has since come back around $197, still double its February price.
Reporting half-yearly results last month, Qantas and Virgin Australia both said they had hedged most of their fuel contracts for the rest of the financial year to the end of June.
Qantas said 81 per cent of its fuel was hedged for June half, yet that figure doesnโt including the more volatile refining margins.
Qantas is in contact with the government and major fuel suppliers, โwho are providing us with a level of confidence about current jet fuel supplies in Australiaโ, said a spokesperson for Qantas.
โBut given the uncertainty of the Middle East conflict and the potential impact on the jet fuel supply chain, we are continuing to monitor the situation closely.โ
Virgin, predominantly a domestic carrier, has hedged 85 per cent of its fuel. Its schedule remains unchanged at this time, with no decisions made regarding capacity changes in response to the fuel price spikes.
โWe have received assurances from our fuel suppliers regarding our near-term fuel requirements,โ a spokesperson for the airline said.
Sydney Airport stressed it has no reliance on fuel supply from China, but its CEO, Scott Charlton, said the discussions about Australiaโs fuel security highlighted the importance of building greater resilience in the nationโs fuel supply, including for aviation.
A longer-term move to reduce the airlinesโ reliance on fuel imports could be a move to low-emissions sustainable aviation fuel (SAF) made of biomass, he said.
To date, little progress has been made in the transition to the new fuel, which is aimed at reducing the environmental impact of flying, even as government mandates in Europe will require airlines to embrace it.
โAustralia already produces many of the feedstocks needed to make SAF, yet much of that material is exported overseas and processed into fuel that we then buy back,โ said Charlton.
โDeveloping a domestic SAF industry would allow us to capture more of that value here at home, while strengthening our energy security.โ
The Market Recap newsletter is a wrap of the dayโs trading. Get it each weekday afternoon.
Chris Zappone is a senior reporter covering aviation and business. He is former digital foreign editor.Connect via X, Facebook or email.
Lisa Visentin is the North Asia correspondent for The Sydney Morning Herald and The Age based in Beijing. She was previously a federal political correspondent based in Canberra.Connect via X or email.From our partners
About the Author
