Asia Group II base oils may extend falls on demand lull

Veena Pathare

23-Jul-2014

Focus story by Jasmine Khoo and Veena Pathare

Asia Group II base oils may extend falls on demand lullSINGAPORE (ICIS)–Group II base oil spot prices in Asia are likely to come under further downward pressure in the weeks ahead amid a seasonal lull in demand and ample supply in the market, industry sources said on Wednesday.

On 18 July, prices of Group II higher viscosity grade 500N were assessed at $1,010-1,025/tonne FOB (free on board) Asia, down by $5-15/tonne from the previous week, ICIS data showed.

For light grade material, spot prices also declined $5-10/tonne over the same period to $1,000-1,010/tonne FOB Asia.

Regional demand for these base oil grades typically weakens in the summer months of June to August pulling down prices, industry sources said.

Lacklustre demand continues to be observed in key markets like China, and is expected to persist through the third quarter of the year, they said.

Improvement in offtake of Group II base oils usually happens ahead of winter, as end-users change their preference and opt for material with better solubility and anti-freeze properties in the colder months.

Apart from current weak demand, new Group II capacities coming on stream in Asia, the US and the Middle East over the next 12 months are raising concerns of oversupply – further weighing down spot buying ideas from Asian importers.

In South Korea, a joint venture 650,000 tonne/year unit of Shell Petroleum Company Ltd and Hyundai Oilbank (HDO) is expected to start up by the end of August, according to some market players.
The plant is expected to boost spot and contractual availability of Group II base oils in an already sufficiently-supplied market.

Competition from deep-sea cargoes of US-origin in India is also affecting the overall Asian market, some industry sources said.

This situation is expected to intensify by August, as fresh supply will hit the international market in the third quarter, with the commercial start-up of Chevron’s Pascagoula Base Oil Plant (PBOP).

In the Middle East, the planned start-up of Abu Dhabi National Oil Company’s (Adnoc) base oils unit in fourth quarter of 2014 will provide an additional 100,000 tonnes/year of Group II light grade base oil into the market.

A number of northeast Asian buyers are being cautious about procuring cargoes from the international spot markets, amid uncertainty in the near-term trend in Group II import prices.

“Offers for import material are still coming in, said a northeast Asia-based Group II buyer. “But our [company’s] focus would still be on domestic availability, especially since it is difficult to tell how import prices would move in the next three to four weeks. It will be less risky to buy domestically,” the buyer said.

Some other market players, however, are convinced that Group II base oil prices may have no more room to fall because of the presently squeezed margins of producers.

“I don’t think prices have much more room to decline. It should be bottoming out within the next few weeks, and we will see demand pick up again in September, a regional trader from Asia said.

“Buyers, who have not bought cargoes in a long time, will likely start to replenish their inventories,” the trader said.

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

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