OUTLOOK ’15: Oversupply to plague China Group II base oils market

By Whitney Shi

SINGAPORE (ICIS)–China is expected to face a severe oversupply of Group II base oils this year on the back of heavy domestic and overseas capacity expansions, industry sources said.

Set against the backdrop of lacklustre demand, prices of the material may have to fall further, they said.

A total of 1.49m tonnes/year of capacity from five new plants will come on stream in China this year and boost the country’s Group II base oils capacity by a third to 2.61m tonnes/year, according to ICIS data.

Elsewhere in Asia, some 1.25m tonnes/year of new capacity will start up – 650,000 tonnes/year from South Korean Hyundai & Shell Base Oil, 200,000 tonnes/year from China’s Hrnd Group and 400,000 tonnes/year from ExxonMobil’s expansion project in Singapore, market sources said.

These producers are also looking to serve the Chinese market, they said.

Demand for base oils, however, will be hindered by an overall economic slowdown in China, industry sources said, adding the country’s GDP growth is expected to decelerate to 7.2% in 2015 from an estimated 7.4% in 2014.

China’s demand of Group II bases oils is forecast to increase by 8.75% in 2015, down by nearly half from 16.94% last year, but more than double the country’s overall base oil demand growth projection of 4.1%, according to industry sources.

Most players expect base oils prices to continue falling amid an oversupplied market.

In 2014, prices of the main Group II N150 grade in east China declined by about 20% to CNY7,375/tonne ($1,186/tonne), according to ICIS C1 data.

Apart from the oversupply, plunging crude values are exerting heavy pressure on base oils prices to fall, market sources said.

“It’d be difficult to see price rebounds (of base oils) … as crude values may remain weak,” one trader said.

Going forward, construction of new Group II plants and the conversion of Group I units into Group II units will be hindered given the current supply glut, industry sources said.

Last year, Group II grades had a 31.4% share in China’s total base oils demand and this is expected to increase to 33% in 2015, industry sources said.

Group I grades will remain the dominant base oils in China with a 36% share of consumption, since blending costs for these grades are lower and lubricant factories need time to switch to blend Group II base oils.

($1 = CNY6.22)

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