Sales ‘bundling’ may hamper trades of Asia brightstock

Focus story by Jasmine Khoo

SINGAPORE (ICIS)–Trading of brightstock in Asia may be hampered despite healthy demand, as regional suppliers are bundling the material with other Group I base oils like SN500, which is in oversupply, market players said on Friday.

Demand for brightstock, which is a Group I high-viscosity base oil, is stable both for production of lubricants and for blending purposes, since it is not competing with any Group II base oil grades, industry sources said.

Reflecting stable demand and snug supply, brightstock spot prices have been on a steady increase since the start of the year, gaining 6.8% from the start of the year to $1,185/tonne FOB (free on board) Asia on 3 October, according to ICIS data.

But suppliers in the region have been selling brightstock together with other Group I base oils grades that are seeing weaker demand, market players said.

Most refiners have been bundling brightstock lots with Group I SN500 lots at a ratio ranging from 1:2 to 1:4. Lot size for brightstock can be as low as 500 tonnes to as high as 2,000 tonnes.

It is a strategy being used by refiners to reduce inventory pressure for SN500 more effectively, they said.

“We are unable to sell brightstock cargoes solely on its own, as we need it to be bundled with the SN500 for sale. SN500 is [in] very ample … supply while brightstock remains limited, meaning that we have to be very careful with how we export these brightstock cargoes. If not, we will be left with too much SN500 in the inventory,” an Asian Group I refiner said.

Other Group base oils I grades have been suffering weaker demand on increased production of Group II base oils, which are deemed to have better specifications given that the process technology used is more advanced, they said.

“There are hardly any enquiries … for purely SN500 cargoes. If we don’t bundle brightstock with other grades, it is not possible for us to lower inventories effectively,” another Group I base oils refiner said.

Spot availability of Group II cargoes increased in the third quarter following new start-ups of new facilities across the globe, thus posing stiff competition for Group I SN500 grades – the prices of which started to fall steadily.

Group II’s 500N can replace up to 90% of the downstream applications of Group I’s SN500.

“Competition from Group II [500N] remains very strong, and it is exerting pressure on us as sellers as well,” the second base oils refiner said.

SN500 spot prices have shed  5.4% from mid-August to $962.50/tonne FOB (free on board) Asia on 3 October, according to ICIS data.

Regional buyers of SN500 either retreated to the sidelines on expectations of further price falls, or turned to focus on Group II cargoes instead.

Against this backdrop, Asian Group I refiners took to focusing more brightstock cargoes, which is seeing comparatively stronger demand compared with other base oils grades.

Brightstock’s spot availability in Asia is snug following the permanent exit of a major Group I base oils refiner in the region in the second half of 2014, and also, because of carefully monitored operating rates at existing Group I units, market sources said.

Majority of Group I base oils refiners in Asia have adopted the bundling strategy for brightstock for both spot and tender sales, market players said.

However, these bundled cargoes were not easily accepted by all buyers, especially for smaller players, they said.

“I am still looking for brightstock cargoes, as we have held off buying for quite some time because of price changes in the market,” a northeast Asian base oils importer said in Mandarin.

“It seems very difficult for me to buy. Most refiners are offering strictly in bundles, and as a small player, I can accept the brightstock, but I cannot afford to bring in the mandatory two, three times more of SN500 cargoes,” the importer said.

In the key China market, buying activity for brightstock is also being hampered given ample supply of imported and domestically produced SN500, negating the need for bundled spot import cargoes.

“We have to think very carefully when it comes to importing Group I material, as northeast Asian-origin Group II 500N is still seeing a supply overhang. Towards the end of the year, if deep-sea origin Group II cargoes come into Asia more actively, there will be even less demand for Group I SN500,” another northeast Asian market player said in Mandarin.

Asia is expected to get an influx of deep-sea base oils cargoes from the US towards the end of the year. The US’ refiners export the cargoes more actively during this time to reduce their inventory, for which they pay taxes.

According to industry observers, the US has increased its exports of base oils into Asia over the past two years amid increased global supply.

With spot base oils supply expected to continue growing for the rest of the fourth quarter, some market players said that the bundling strategy adopted by Group I refiners would just continue to impede trade for brightstock.

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