Base Oils 2013: US wrestles with changing supply

15 February 2013 09:51  [Source: ICB]

US base oils will have to contend with changing supply conditions in 2013, as increasing production capacity and expectations for flat global economics appear poised to continue the price squeeze that emerged in the latter months of 2012.

Spurred by oversupply in Asia and Europe as well as full inventories in the US, steep November 2012 price reductions were taken by the Group II and III base oil tiers. These base oil tiers moved prices down by 25-48 cents/gal in November, depending upon the viscosity grade and producer.

Fire struck the No. 4 crude unit at Chevron

 Rex Features

Fire struck the No. 4 crude unit at Chevron's Richmond refinery on 6 August 2012

Sensitive to the narrow price gap between Group II and Group I, Group I producers decreased posted prices in November by 20-21 cents/gal, then dropped them again in December by 16-28 cents/gal.

Group I paraffinic brightstock posted prices were at $4.70-4.90/gal (depending upon the supplier) in October, moving down to $4.21-4.42/gal by mid-December, on the same basis.

US Group II producers dropped posted prices in January 2013 to contend with the supply situation, with reductions of 25-40 cents/gal put into effect in posted prices.

The January decreases brought 600 grade Group II material to a range of $4.45-4.75/gal in posted prices, depending upon supplier. US naphthenic base oil prices also fell, with late November price drops of 20-21 cents/gal announced, and implemented, by most naphthenic suppliers.

Falling prices in Asia and Europe also threatened to offer buyers in the Americas expanded options for imports. Suppliers and buyers acknowledged that US fourth-quarter price reductions were sparked in an effort to narrow arbitrage windows.

In December, US buyers continued to shy away from imports because of ongoing uncertainty in the other regions as well as readily available domestic supply. But going into 2013, there are signs that the base oils market is changing and US base oil participants can find support to contend with the growth in supply.

US domestic demand held a flat pace in November and December, with seasonal lows exacerbated by a still unimpressive domestic economic scenario. Some market participants had expected Group I heavy neutral production to shrink significantly by 2013, driven by new capacity additions in Group II and III, with well over 10% Group I loss anticipated.

GROUP I-III BALANCES

Projections about the impact of a looming tilt to Group II and III production have littered the field, with comments ranging from potential Group I plant closures to the disappearance of the tier. A global view of base oil market share forecast for 2014, as researched by Amy Claxton of My Energy is shown in the pie chart at right.

The 53% Group I segment of the chart represents about a 4 percentage point erosion of global Group I production capacity share when compared with 2012. The decline to 53% of total production capacity stems from cuts in North America and Europe, according to the research. The difference underscores how Group I base oil production is keeping pace with changes in the industry. And despite significant production advances in Group II and III, Group I production continues to form the backbone of global base oil output.

Global capacity additions in 2012 included SK-JX Nippon Oil's Ulsan, South Korea, facility, with 10,000 bbl/day of new Group III output, and S-Oil's 3,000 bbl/day expansion of Group II/III material at Onsan in South Korea. In the US, Chevron's 25,000 bbl/day Group II plant at Pascagoula, Mississippi, is scheduled to move into production during the fourth quarter.

There are also capacity increases in the US re-refining sector, now able to produce Group II stock. Re-refining companies are forging new routes to meet the increasingly stringent environmental and performance mandates in step with criteria specified by the American Petroleum Institute (API) for virgin base stocks.

According to industry analysts at Kline & Company, tabulations put 2012 North American re-refining capacity at slightly under 800,000 tonnes/year, spread between locations in the US and Canada. By 2017, if capacities expected to come on stream do so, North America's re-refining capacity is expected to slightly exceed 1m tonnes/year.

LONG SUPPLY TO CONTINUE

Such significant capacity increases as that conferred by the upcoming Pascagoula facility, a strengthening presence in re-refining, and the notable growth in Asia have already impacted the market at the end of 2012 and are expected to continue to do so throughout 2013.

Supply length in US Group II became evident as the outage at Chevron's Richmond, California, refinery exerted little, if any, impact on the domestic market. However, this situation abetted keeping Group II Asian import opportunities largely sidelined and curtailed European Group I opportunities into Mexico because buyers could readily source from the US at attractive prices.

base oil forecast"The Chevron outage in Richmond, California, has actually helped to keep the market steady during a time of weak demand," a supplier says. "I think we are all concerned about the potential Group II supply tsunami that could come when all plants are operating and new capacity comes online in the US Gulf next year," the source adds.

By the middle of 2012 it became clear that struggling global economies in Europe and Asia were clamping some US export options because buyers in these regions were pushing for lower prices.

Lubricant demand in these regions was also quite weak and continued to stay soft across the remainder of the year, yielding full inventories and reduced regional buying interest.

Lubricant demand in the US upheld standard performance features in 2012, but the ongoing economic uncertainties have stanched enthusiasm that 2013 is likely to display significant upticks. Finished lubricant prices moved down in the fourth quarter, following lower base oil costs, according to market sources.

"We are seeing engine lube costs go down in November," one source said. Industry sources said decreases of 30 cents/gal were announced by base oil and finished lube supplier Phillips 66; another supplier's grease prices decreased by 2 cents/lb, all effective in fourth-quarter business.

Chevron also announced price decreases of up to 4% on its finished lubricants, gear oils and greases, effective in December. Finished-lubricant producer CITGO implemented 30 cents/gal decreases on lube products and 2 cents/lb on greases effective in December, sources said.

While it is evident that US base oils buyers and sellers will have to contend with ample global supply, the regional needs of the North American Free Trade Agreement countries (US, Canada and Mexico) seem poised to undergo changes that may counter supply growth to some extent.

Balanced fundamentals are not anticipated in 2013, but the industry is working to find routes to cope with the challenges of capacity growth amid shifting domestic market needs and increasing regulatory requirements.

AUTOMOTIVE GROWTH KEY TO DEMAND OUTLOOK

Finished lubricant and grease products are the key end-use products for base oils because base oils form the basic carrier oil for a variety of ingredients. These ingredients include additive packages and other performance chemicals.

Finished-lube products include the engine oils, greases, transmission oils and numerous other lubricants that go into the upkeep and performance of vehicles.

Finished lubricant prices typically follow base oil prices up or down, lagging by various time spans, but usually by about a month.

Hopes for improvement during the first half of 2013 reside mostly in North and South American business, as Europe appears economically mired, and China does not show signs of rebounding soon.

For North America, base oil buyers say expectations are that demand from the factory-fill end-use segment will increase not only on the seasonal uptick, but also on overall improvement in vehicle production and sales.

Supporting that premise, the global light duty automotive fleet of nearly 900m vehicles is expected to nearly double by 2030 as developing economies display demand for more cars. Demand preferences in the US are expected to also trend toward smaller, more energy-efficient vehicles as corporate average fuel economy (Cafe) requirements and other environmentally based stipulations begin to exert influence and changes in the overall complexion of motor vehicle types.

Use of hybrid cars and alternative fuel vehicles is expected to grow, with estimates by industry experts that suggest the 72% gasoline-powered vehicle representation present in 2010 could fall to 51% by 2030.

Diesel pick-up truck sales are forecast to grow to 50%, assuming automakers use diesel to meet new Cafe standards. Commercial truck users are already buying diesel-powered large pickups, industry analysts say.

Also relevant to the North American market, Mexico's consumption of Group II base oils is growing.

  • Judith Taylor is senior editor for US base oils and is based in ICIS' Houston, Texas, office. She also reports on oleochemicals and crude and refined glycerine

By: Judith Taylor
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