Base Oils 2013: Oversupply hits Asian markets

15 February 2013 09:51  [Source: ICB]

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

Price volatility will continue to be seen on the back of buoyant feedstock gasoil and with fuel oil prices mirroring price movements in the crude oil sector.

Lunar New Year celebrations will be followed by subdued base oils buying interest Rex Features

Rex Features 

Lunar New Year celebrations will be followed by subdued base oils buying interest

As in 2012, global economic issues will continue to be a key factor in base oils supply and demand fundamentals.

Last year saw a dip in demand for automobiles in many industrialised nations as cuts in consumer spending curtailed buying interest for automobiles and in turn, softened demand for base oils.

Moreover, lacklustre shipping demand towards the second half of 2012 saw many ships anchored in regional shipping hubs in Asia. Weak industrial output in southeast Asia towards the end of last year also stemmed growth in the container shipping industry with many regional logistical hubs in Asia citing weak demand and slow sales. These factors resulted in a cutback in industrial and marine lubricants production, and thus the need for base oils.

Economic factors throughout Asia in 2012 were largely unfavourable to the Asian base oils industry and resulted in regional cutbacks in base oils production from July onwards as demand weakened considerably towards the end of the year. Several of these 2012 trends are likely to continue into 2013.

GROUP III OVERSUPPLY

First, prices of premium Group III base oils are likely to remain soft amid wide availability of supply. The estimated global supply of Group III base oils total 2.9m tonnes/year, far exceeding demand, according to industry participants. Recent increases in capacity include the 400,000 tonne/year Group III base oil plant in Bahrain, operated by Finland's Neste Oil, and the 500,000 tonne/year Group III base oil plant in Ulsan, South Korea, a joint venture of South Korea's SK Lubricants and Japanese refiner JX Nippon Oil & Energy, among others.

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

As Group III base oils are largely exported to Europe and US for production of premium automobile lubricants, the slow growth in these two Western markets is likely to persist in 2013. While some demand is expected to return from China, most market participants agree that it is insufficient to support demand growth in the Group III base oils sector.

NEW CAPACITIES

Second, Group II supply may exceed demand with new capacities upcoming in the Northeast Asian 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's 300,000 tonne/year plant and an expansion of Hainan Handi Sunshine Petrochemical's 300,000 tonne/year plant to 1m tonnes/year may see China gradually shifting from a net importer of Group II base oils to a net exporter of Group II base oils in the coming few years.

Several market participants also note that, with these new planned capacity coming on stream in 2013, Group II prices may be capped at current levels and are unlikely to see large increases in 2013.

However, other market participants point out that if demand continues to remain weak throughout 2013, amid global economic woes, the planned capacities may be delayed and a supply-demand balance may emerge.

DOMESTIC COMPETITION

Lastly, imported Group I and II base oils in China and India are also expected to continue to meet with price competition from domestically produced cargoes. As seen throughout the final quarter of 2012, several domestic India and Chinese refiners have reduced the prices of domestically produced cargoes to compete with imported cargoes. This has led to an increase in local buyers preferring to buy cargoes from the domestic market as shipping times are shorter and there is flexibility to buy smaller tonnages on a need-to basis.

This has been especially seen in the Indian market. This situation, where domestic cargoes are priced competitively to imported cargoes in the India market, is expected to continue in 2013.

Chinese oil supply Rex Features

 Rex Features

Asia braces for base oils oversupply in 2013 as new capacity comes on stream

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 will fall to pre-Lunar New Year levels as the overall Asia-Pacific market is expected to be subdued in the first quarter of 2013 because of the oversupply situation.

Meanwhile, planned maintenance shutdowns at South Korea's GS Caltex's 1.3m tonne/year Group II/III plant in March, S-Oil's 500,000 tonnes/year Group III plant in March and Malaysia-based Petronas's 330,000 tonne/year Group III plant in January are expected to help correct the current oversupply situation in the Asian base oil market at the end of the first quarter and bring a balance to supply and demand in Asia-Pacific.

Buying-interest across Asia-Pacific is anticipated to firm up in quarter two as inventories deplete. Buyers who have held back on stock replenishing activities in the first quarter are expected to return to the market and pick up cargoes.

Demand led by these stock replenishing activities is expected to give some support to higher prices in quarter two.

The Indian market is expected to continue to turn to Iranian suppliers to meet the bulk of India's import demand, especially for Group I base oils. Price competition between import cargoes and domestic cargoes are likely to continue throughout 2013. Group II demand in India will continue to be met by Northeast Asian refiners with 70N grade of base oils expected to remain in high demand in 2013.

The burgeoning transformer oil industry in India will see an increase in imports of US origin naphthenic base oils in the first two quarters of the year, Indian market sources added.

With no maintenance shutdown planned in Southeast Asia in 2013, the region is expected to continue to be a net supplier of Group I and Group II base oils.

Demand is expected to continue to come from local markets as well as export markets within Southeast Asia, such as Indonesia and Vietnam, as well as the Chinese market. The limited availability is expected to help bolster demand and cap prices stable-to-firm throughout the year.

  • Serena Seng is a senior markets editor for base oils and bitumen, based in ICIS' Singapore office

By: Serena Seng



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