Asia Group II base oils to weigh on Group I demand, prices

Focus story by Jasmine Khoo and Veena Pathare

SINGAPORE (ICIS)–Asia’s Group I base oils price movement both in the near-term and future is expected to be heavily influenced by the situation in the Group II market, market players said at the sidelines of the Asia Base Oils conference on Thursday.

With Group II material poised to become the largest in terms of volumes amongst the three groups, Group I spot price movement is expected by some market players to be influenced by Group II price trends.

This is especially so for grades such as SN500, for which over 90% of downstream applications can be replaced by Group II’s 500N.

Over the course of the next five years, Group I cargoes are expected to decline in volume on the back of approaching permanent shutdowns in the market.

At the same time, expansions for Group II are expected to lead to an oversupply across markets, given the growing but presently limited usage in key Group I-dominant markets such as China, India and the Middle East.

“Going forward, more Asian importers will start to buy Group II and Group III as demand for high quality lubricants come from the growing luxury car sector. But this will take time, especially since the rural areas will still be using Group I,” a south Asian producer said.

Despite the majority of buyers in the regional key markets still using Group I material primarily, some regional producers still expressed optimism over the switching of Group I usage to Group II usage among Asian buyers in the long run.

Despite the recent tightness in availability of Group I cargoes in India, the ample supply of Group II, both light and heavy grades have largely capped any further increase in Group I prices.

Offers of Group I SN500 cargoes to India at $1,100/tonne CFR India were deemed high by importers, who held Asian offers for the Group II equivalent at $1,100-1,110/tonne CFR (cost & freight) India.

Consequently, bids for Group I SN500 lots remained firmly capped at $1,060/tonne CFR India.

Likewise, deals for light grade Group II 150N cargoes from northeast Asia at $1,050/tonne CFR India weighed on buying interest and prices for Group I SN150 cargoes, because of an absence of a significant price difference between the two groups.

Traditionally, Group II cargoes have commanded a premium over Group I because of its superior quality.

Deals were heard concluded for SN150 and SN500 cargoes from Russia at $1,060/tonne CFR India and $1,070/tonne CFR India. However, the quantities sold could not be immediately confirmed.

Market participants acknowledge that this trend is expected to continue in the longer-term, and will most likely intensify, given the additional capacities that are expected to come on-stream in late 2014 and 2015.

New Group II capacities that are expected to come into operation in the near-term are the Hyundai Shell plant in South Korea and the Abu Dhabi National Oil Company (ANOC) plant at Abu Dhabi, UAE (United Arab Emirates).

While the bulk of the production capacity at ADNOC is for Group III production, it is also expected to add around 100,000 tonnes of Group II light grade base oil into the market.

The recently started-up Chevron’s Pascagoula base oils plant at Mississippi, US is expected to add an additional 1.2m tonnes/year of premium Group II base oils into the market when it commences commercial production.  

With the US market expected to be amply supplied through local production in the near future and Middle East expected to take a longer time to switch to Group II usage, market players expect Asia to be thrown into the limelight as an ideal market to sell to.  

The ICIS Asian Baseoils conference was held in Singapore on 25-26 June, 2014.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections