OUTLOOK '08: High-end Asia base oils boost lubes

03 January 2008 04:36  [Source: ICIS news]

By Shibu Itty Kuttickal

SINGAPORE (ICIS news)--The launch of new Group II and Group III lube base oils plants in Asia in 2008 will mark the a new phase of increased use of new lubricant formulations that are fuel-efficient and compliant with international emission norms, market participants said on Thursday.

About 1.3m tonnes of new capacity - all Group II and Group III - are expected to be added to the present base oils output from the region by the end of 2008.

"There is bound to be changes in lube formulations. We will see lubricant blenders increasingly moving towards formulations using Group II and Group III base oils and moving away from Group I," an Indian blender said.

"Anyway, Asia is net short in Group I."

The increasing use of cars in China and India was leading to rising demand for better engine performance in terms of fuel economy, while new emission laws will also generate higher demand for Group II and Group III base oils.

"There is intense pressure on engine makers to sustain a better engine performance. China has implemented new emission regulations and Euro IV could be the standard here by 2010," a Shanghai-based blender said.

"Engine durability is coming under scrutiny and original equipment manufacturers are seeking better and better engine oils for new engine systems and after-treatment systems,"  a Shanghai-based blender said.

However, ample availability in Asia, which accounts for about 35% of the global base oils market, could be the biggest driver for base oils buyers in the region to shift from Group I to Group II and Group III grades.

Buyers will find high-quality Group II and Group III base oils available at prices lower than Group I, which could put pressure on base oils producers all over the world, especially as feedstock prices surge on high crude oil prices.

"As feedstock prices rise, sellers will pitch for higher prices, but buyers will continue to look for the best bargains," a base oils trader in the region said.

"New producers will want to aggressively market their oils and they will be a godsend for buyers looking for attractive bargains."

Already, a Group II producer in Asia, which came on stream in November 2007, has slashed prices to gain market share in northeast Asia and India, putting pressure on base oils sellers.

"This drama will be enacted each time a new entrant comes on line," the trader said.

A new Group III/Group II producer expected to come on stream by mid-2008 seemed to agree.

"Obviously, I won't say what I'll do when I come on stream. But generally speaking, new manufacturers will go all out to get their share of the pie and you may find Group II and Group III being sold on par with Group I or even at lower levels," a senior official with the producer said.

These developments are not without parallels in recent years.

When Excel Paralubes Group II refinery opened in the US in the mid-1900s, it had created a flood of new high quality base oils which the lubes market could not readily absorb and for which there were few formulations.

This resulted in Group II and Group I oils being sold at almost the same price.

In fact, Group II products from the latest base oils plant in Asia have been sold at prices lower than Group I.

Sales to India and China are heard at or below $750/tonne (€510/tonne) FOB (free on board) Asia for Group II 150 Neutral, as against the prevailing levels for the comparable Group I Solvent Neutral (SN) 150 at $790-810/tonne.

Analysts feel such a situation could lead to some inefficient Group I plants being closed down in Asia and some others being converted for Group II production. This could, however, lead to a further shortfall in brightstock, a grade that is already in tight supply in Asia and which is produced by Group I plants.

Already about 8,000 bbl/day of brightstock supply has been taken out of the system in the last decade because of the shutting down of Group I plants, although demand for the grade has continued to rise.

Market players also feel that producers of offspec Group I base oils like those in the Middle East and eastern Europe would be at a competitive disadvantage in such a situation as buyers would find the latest Group II offerings at attractively low rates.

"Iranian producers may see the going particularly tough also because of the international sanctions against that country," said an Indian trader who is active in bringing in Iranian base oils.

($1 = €0.68)

By: Shibu Itty Kuttickal
+65 6780 4359

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