INSIGHT: Asia base oils industry to grow modestly in 2013

13 February 2013 14:00  [Source: ICIS news]

By Serena Seng

SINGAPORE (ICIS)--Asia Pacific base oils demand is expected to grow modestly in 2013, with growth spread throughout the region and in countries in southeast Asia and India.

Price volatility will continue to be seen on the back of buoyant feedstock gasoil and fuel oil prices, mirroring price movements for crude. As in 2012, global economic issues will continue to be a key factor in base oils supply and demand.

Demand for automobiles in many industrialised nations dipped in 2012, for instance, as cuts in consumer spending curtailed buying interest. This, in turn, led to softer base oils demand.

In addition, lacklustre shipping activity in the second half last year kept many vessels anchored in regional hubs in Asia. Weak industrial output in southeast Asia towards the end of the year also hindered growth in the container industry, with ports reporting weak demand and slow sales.

These factors reduced the need for base oils and resulted in a cut back in industrial and marine lubricants production.

The macroeconomic factors throughout Asia in 2012 were largely unfavourable to the Asian base oils industry, and resulted in cutbacks in production from July onwards as demand weakened considerably.

Several of these trends are likely to continue in 2013.

For instance, prices for premium group III base oils are expected to remain soft because of wide supply availability. The estimated global supply of Group III base oils totals 2.9m tonnes/year, far exceeding demand, industry participants say.

The supply base includes the 400,000 tonne/year Group III base oils plant in Bahrain, operated by Finland’s Neste Oil, and the 500,000 tonne/year Group III base oils plant in Ulsan, a joint venture between South Korea’s SK Lubricants and Japanese refiner JX Nippon Oil & Energy.

While 10% of Group III base oils are used in process oils and cosmetics applications that are likely to provide continued stable growth in 2013 about 90% are used in premium lubricants in the automotive sector, which has seen production cutbacks in the weak global economy.

As Group III base oils are largely exported to Europe and US for production of premium automobile lubricants, slow demand growth in these two regions is expected to persist in 2013. Some growth is expected to return in China, but most market participants agree that it will be insufficient to support global Group III base oils demand growth.

Group II base oils supply might also exceed demand, with new capacities upcoming in the northeast Asia market. These include a 650,000 tonne/year Group II base oils joint venture plant by Shell and South Korea’s Hyundai Oilbank. The plant, in Daesan, is expected to be fully operational in the second half of 2014.

Meanwhile, planned Group II capacities in China such as Sinopec’s Yanshan Petrochemical 300,000 tonne/year new base oil plant and an expansion of Hainan Handi Sunshine Petrochemical 300,000 tonne/year Group II plant to 1m tonnes/year  may see China gradually shifting from a net importer to a net exporter of Group II base oils. 

In addition, the trend where domestic cargoes are priced competitively against imported cargoes in the India market is expected to continue in 2013. 

Looking ahead, the traditional pickup in buying interest ahead of the Lunar New Year festivities in February will help bolster some demand in export markets such as Thailand, Indonesia, Japan, South Korea and Taiwan across all grades of base oils.

However, this spike in demand is expected to be temporary and demand will fall to pre-Lunar New Year levels in the first quarter across the Asia Pacific market as a whole.

Planned maintenance shutdowns by South Korea’s GS Caltex at its 1.3m tonne/year Group II/III plant in March, S-Oil’s 500,000 tonne/year Group III plant in March. and the Petronas 330,000 tonne/year Group III plant in January, are expected to help correct the oversupply situation and bring some balance back to the market.

Southeast Asia, however, is expected to remain a net supplier of Group I and Group II base oils. Demand is expected to continue to come from local markets: export markets within southeast Asia, such as Indonesia and Vietnam, as well as the Chinese market. Limited availability is expected to help bolster demand and keep prices stable to firm throughout the year.

By: Serena Seng

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