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Imports of fuel oil into China declined by approximately 23 percent to 1.62 million tonnes in March compared to 2.1 million tonnes the previous month, market sources said on Thursday.

March import volumes are also likely to have dropped by 19 percent in a comparison with the same month a year ago.

The news follows data released by the General Administration of Customs last month, which said that imports of fuel oil into China had increased by approximately 0.52 million tonnes in February 2009 as stockpiles accumulated ahead of a fuel tax increase on January 1st appeared to be slowly drawn down.

Fuel oil imports were reported to have risen by 33 percent last month to 2.1 million tonnes from 1.58 million tonnes in January.

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.

However, fuel oil demand has now slowed to a trickle as the economic climate and poor margins have prompted local "teapot" refineries to cut runs after the tax hike was imposed.

These independent refineries usually import straight-run 180-centistoke (cst) fuel oil to process into industrial grade diesel and low-octane gasoline as they have limited access to crude oil. Teapot refineries make up approximately 20 percent of China's total refining capcity and are located in the southern province of Guangdong, China's manufacturing hub, and in the eastern Shandong province.

The 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, which was between $2.30 and $3.00 per tonne in March, reached a low of around $1.50 per tonne in mid-February after reaching highs of $13-$14 per tonne last November.

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

Some analysts have predicted that China's fuel oil demand may begin to recover in June. However, imports could be tempered over the coming months as state refineries raise crude runs and a new plant also started up last month.