Base oils 2013: European outlook remains uncertain

15 February 2013 09:52  [Source: ICB]

The European Group I base oils market experienced a roller coaster year in 2012 and the outlook for this year is clouded by uncertainty. The outlook for the Group III market is equally unclear after rising supplier competition led to a steady downward pricing trend during much of 2012.

On the Group I market, a recurring cycle of price surges and price declines has established itself in Europe over the past two years. Like other markets, base oils is susceptible to seasonal demand and price swings. However, the cycle concerns many, as it sees widespread production cuts take place at its nadir because of squeezed margins.

Roller Coaster Rex Features

 Rex Features  

Late 2012 was a period of sustained price decline across the board. Faced with unsatisfactory margins and firm feedstock costs, several suppliers across Europe reduced base oil production rates. At time of writing in mid-January, many remain at reduced operating rates and there are signs of price stability emerging and even slight firming in certain regions.

Improving demand, or disrupted supply could prompt the next price surge, market sources say. This would mirror last year's chain of events when a sharp price decline in late 2011 prompted several base oil producers to curtail production rates. This then led to a supply squeeze when freezing weather delayed shipments and demand rebounded.

Accordingly, base oil prices rocketed during the second half of the first quarter and the first half of the second quarter 2012, supported by imbalanced supply and demand.

This cycle of spiralling and then falling Group I prices suggests the market is struggling to find a sustainable supply/demand balance. "The equilibrium is not there and that is for sure," says one Northwest European Group I producer. "Definitely, the market is not balanced."

Last year, Mauritius-based Essar Energy announced that it was pursuing the closure of base oils production at its Stanlow refinery in the UK. Essar Energy will look to stop the Stanlow unit, which has a nameplate capacity of 260,000 tonnes/year of Group I base oils, in a bid to improve its refining margins.

Other European Group I producers may soon follow suit. "There is possible overcapacity on Group I. When everyone is producing it is too much, but then everybody cuts production rates and brings it into balance or even short, and then it starts again," explains a Northwest European trader/distributor.

DISAPPOINTING SALES

Cautious buying habits amid widespread economic uncertainty impacted base oil trade throughout 2012. The fourth quarter of 2012, in particular, disappointed in terms of base oil trade levels in both the domestic and export markets and prices reflected the malaise. For example, European Group I domestic SN150 prices fell by an average of $125/tonne in the fourth quarter alone, while European SN150 export declines averaged $147.50/tonne.

Buyers remain cautious in early 2013, and nervous about the sharp price movements that can occur. "[Buyers] take a lot of time when making decisions. They are nervous of any signs of price movement. If they feel prices are on a downtrend they wait and suspend their buying decisions," explains a Southwest European Group I producer.

While Group I prices have been on a roller coaster ride, Group III prices trended steadily downwards during most of 2012, as increased supply prompted greater competition among sellers.

Sellers note the increased presence of base oil from the Americas and Middle East and say this is creating a more competitive sales environment. The price trend is a reflection of this.

At time of writing, domestic 4cSt free carrier (FCA) Amsterdam-Rotterdam-Antwerp (ARA) prices are around €350/tonne below the same time a year earlier. "Our margins have got a lot smaller when we compare with the previous year," says a Northwest European trader/distributor.

The increased role of Group II base oil within Europe has also played a part in the market share and price development of both Group III and Group I base oils. Up until this year, Group III base oils were seen as the main beneficiary of the gradual market shift away from Group I base oils dependency in Europe, with Group II base oils seen in less significant volumes.

However, a clear change was noted in 2012, as Group II base oils played a larger role. Group II base oils are seen as preferable to Group I for various reasons, including lower sulphur content and higher saturates.

GROUP II FORMULATIONS

Previously, most lubricant formulations in Europe were based on Group I and Group III base oils. However, over the course of the year, more European formulations have permitted Group II oils to be used. "The last year we saw something new in Europe. There were supplies of Group II from Asia that were replacing Group I," explains a Southwest European Group I producer.

The US and Asia are the major supply sources of Group II base oils globally, and with supply rising both sources are being seen within Northwest Europe in increasing volumes (see base oil projects list, page 20).

"A lot of Group II base oils supply is also coming on stream," explains Geeta Agashe, senior vice president, energy, at Kline & Company. "They are all trying to find a home for their Group II. The marketers are really trying to push Group II into Western Europe."

Going forward, both Group I and Group III prices are likely to be squeezed by its presence as it is substituted into lubricant formulations.

FINISHED LUBRICANT DEMAND

A lack of downstream demand in the finished lubricant sector was an overarching feature of the base oils market last year and the trend looks set to continue. "Western European volumes [of lubricants] have been shrinking consistently over the last decade," explains Agashe. "Even if it rebounds a bit, because it declined in double digits, it will not return to the same level as 2007."

Europe's major lubricant-consuming industries had previously been supported by healthy demand for exports to markets like India and China. "A lot of the automotive industry and heavy machinery is exported out of Europe into the emerging growth markets," she explains. "A lot of the markets that helped Western Europe are now facing their own woes."

Going forward, Kline believes the European lubricant market will be influenced by numerous factors, including the ongoing eurozone debt crisis, which is creating much doubt. "Markets do not like uncertainty. If that clears up, that will certainly help," adds Agashe.

EU price fluctuations

Marketers will be eager to see growth in key industries such as automotive, metals and construction. At the moment, many of these solid indicators are showing bearish tendencies.

For example, European passenger car registrations fell sharply in December 2012, declining 16.3% year on year, according to data from the European Automobile Manufacturers' Association. In total, 799,407 new passenger cars were registered in the region in December, down from 955,537 units registered in the same month in 2011.

The industry body said the decline was the steepest recorded in the month of December since 2008. For the whole of 2012, demand for new cars reached the lowest level recorded since 1995, totalling 12,053,904 units.

The economic health of trading partners such as the US and those in Asia, and the volatility of crude oil pricing as the upstream cost factor, will also pay an important role in lubricant market development going forward. "I think it is going to continue to be a tough year for finished lubricant marketers," says Agashe.

These combined factors suggest that 2013 will be another uncertain and challenging one for Europe's base oil market.

Group I suppliers seemingly face the ongoing cycle of pricing peaks followed by troughs, which see margins squeezed and production rates curtailed.

SOPHISTICATED LUBES GROW

This will come amid the ongoing shift away from Group I dominance, driven by the automotive sector's demand for more sophisticated lubricants, and the rising presence of imported Group II base oils.

"I think for sure that Group II will get more and more of a role in Europe," says a Northwest European trader/distributor.

For Group III sellers, further new capacity set to come on stream in 2013 and 2014 means that competition will rise further, with Europe one of the key battlegrounds.

Lubricant companies will need to be agile and flexible to adapt to the market conditions, says Kline.

Simply put, 2013 looks set to be another interesting year for the entire industry.

  • Carl Roache is ICIS senior editor manager (Europe) for crude products, including base oils. He is based in ICIS' offices in central London

By: Carl Roache
+44 20 8652 3214



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