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SINGAPORE: China's imports of a fuel used for blending into the diesel pool have nearly doubled from a year ago as a curb in refinery production and low inventory boosts overall demand for diesel, several trade sources said this week.

Demand for diesel, which is used in agriculture, transport, shipping and mining, is expected to rise further in China in the second half on the back of expected growth in infrastructure projects, they added.

"Many people talked about diesel demand peaking in the last few years, but demand growth should accelerate in the second half of 2019 as the government increases investments to support the economy," SIA Energy analyst Seng Yick Tee said, adding that he expects overall diesel demand to grow by 2.7 percent this year from last year.

Refining output cuts in May and June by coastal plants hit by refining losses and low inventory of the fuel are helping to boost demand, a source with a Chinese refinery said. Exports of diesel also fell 50 percent in May from a month earlier, customs data showed. Shipments were held back to meet domestic demand, said a second source with a Chinese refiner.

To help meet the gap, China has stepped up imports of light cycle oil, a type of blendstock that refineries also use as feedstock in some units.

Imports have doubled to about 3-4 million barrels a month, mainly from South Korea, several traders said, with premiums for the fuel increasing to $6 to $7 a barrel to gasoil quotes from a discount of $1 in January, several traders said.

"Demand is very good from China and they are buying for blending purposes ... our overall volumes to them have gone up from last year," a source with a South Korean refiner said.

A second source with a South Korean refiner said the refinery's sales of LCO have doubled from January.

Taiwan's Formosa Petrochemical Corp which produces LCO for domestic use is considering exporting the fuel due to the firm premium, a source familiar with the matter said.

China had previously imported LCO as part of a tax loophole that allowed Chinese buyers to import the fuel and sell it as low-grade diesel to avoid taxes normally levied on diesel.

Imports fell two years ago when the Chinese government was expected to levy taxes on it, though that has yet to happen so far, trade sources said.

Copyright Reuters, 2019