Base oils: Asia feels the winds of change

Jasmine Khoo

13-Feb-2015

Great challenges lie in store for Asian base oil markets amid winds of change, as market players contend with evolving market conditions and upstream price volatility

Asian base oil markets will have to cope with increasing challenges in 2015, brought about by changes in the regional base oils landscape. These will test the ability of market players to react quickly to the evolving environment.

Last year was widely regarded by market participants as a challenging year, too. An existing bearish sentiment extending from 2013 suffered a further blow in the second half of the year when upstream crude prices more than halved between June 2014 and January 2015.

 

 Winds of change: base oil markets in Asia are facing challenging times

Copyright: Rex Features

Factors such as supply, demand and economic conditions took a back seat in dictating price movements as the slump in crude prices weighed heavily on base oil spot prices, resulting in declines of over 30% for some grades.

Even brightstock prices, which were firming steadily since the start of 2014 until September on the back of snug spot availability, could not hold up against the heavy downward pressure exerted by the crude oil price slide.

Squeezed margins became a common feature of the market and most market players incurred losses, not only from selling at discounts but also from storing material in inventories while upstream prices continued to drag base oil spot prices on a downward spiral.

NEW CHALLENGES
Demand, on the other hand, weakened steadily as mounting pressure from upstream declines pushed buyers to maintain a cautious approach to procurement. Most buyers opted to maintain lean inventories to avoid potential losses, which sliding crude oil prices could bring about.

Adding to the pessimism plaguing the Asian base oils industry was a slew of plant start-ups in both the regional and global ­markets in the second half of 2014. These included the 650,000 tonne/year Group II base oil joint venture facility built by Shell and Hyundai Oilbank in Daesan, South Korea, and Chevron’s 25,000 bbl/day Group II base oil plant in Pascagoula, Mississippi, US.

The increase in global supply also brought about new challenges for the Asian base oils market in the form of competition from deep-sea cargoes, as sellers based outside Asia actively sought outlets for their material in the event of open arbitrage opportunities.

Despite lower-priced deep-sea cargoes not always being popular with Asian buyers because of the longer voyage time needed for the cargo to arrive, some market players agreed that the presence of lower deep-sea offers weighed down on the buying ideas of Asian importers.

Furthermore, not only was competition coming from material of non-Asian origin, stiff competition was also observed within the Asia market – especially following the start-up of northeast Asia-based facilities. What was sometimes described as a “price war” by market players was observed in the Asian market, whereby even refiners selling base oils of different API groups were competing among themselves.

As a result of the ready availability and competitive pricing of Group II cargoes, an increasing number of buyers were shifting to use Group II instead of Group I and this prompted price cuts among Group I refiners as well to stimulate buying interest among importers.

Production shifts and technological improvements are thus heralding a different base oils landscape, in which Group I refiners find themselves grappling with reduced demand as more buyers gradually adopt the use of Group II over Group I. As demand shifts and Group I usage becomes increasingly obsolete, a greater production shift from Group I to other grades such as Group II and III can be expected from Asian refiners.

For Group II and III refiners, the challenge will likely present itself in the form of stiff competition for sales and new markets, which could potentially cap upward price movements for Group II going forward for the rest of 2015.

WEAK FUNDAMENTALS, BEARISH ECONOMIC OUTLOOK…
Extended declines in Asian base oils pricing were seen during the first half of January 2015, with slides in crude oil and pessimistic market sentiment impacting spot prices. However, stability returned to the market towards the end of January, with the approach of the traditional restocking period prior to the Lunar New Year festivities in parts of Asia such as China, Taiwan and South Korea. This year’s Lunar New Year falls on 19 February.

Furthermore, with South Korea’s SK Lubricants’ 38,500 bbl/day facility and Taiwan-based Formosa Petrochemical Corp’s (FPCC) 600,000 tonne/year Group II base oils unit in Mailiao due for a scheduled turnaround in March, some market players are expecting prices to either stabilise or move up on snug spot availability.

… WILL LEAD TO OVERSUPPLY
Despite encouraging signs, uncertainty continues to plague the base oils market as earlier slides in upstream values have depleted buyers’ confidence. While some market players voice expectations of firming prices on the back of tightening supply and improved demand, others remain sceptical, saying that these supporting factors are temporary.

The slew of regional and global expansions and new capacities means that the Asian market is likely to remain oversupplied, especially for Group II. Meanwhile, demand and sentiment remain dampened in the wake of the relentless crude oil price fall in late 2014, and are unlikely to lend significant upward support to base oil prices.

Furthermore, bearish macroeconomic conditions in Asia do not bode well for the base oils market. China’s Purchasing Managers Index (PMI), a gauge of conditions in the manufacturing sector, slipped to 50.1 in December 2014 from 50.3 in the previous month, reaching the lowest reading in a year and a half.

Any reading above 50 indicates growth, but a reading of 50.1 reveals that the growth rate in the key China market is no longer what it used to be in the last decade.

However, the path ahead is not all gloomy. According to industry sources, global demand for downstream lubricants is expected to reach 44.22m tonnes by 2020, on the back of growing automotive markets and industrial production.

Industry research findings also reveal that Asia-Pacific is the leading regional market for lubricants, accounting for over 40% of global consumption in 2013, and presently remains the fastest-growing market.

With projected demand growth in the downstream lubricants market, Asian market players will have to position themselves to catch the winds of change in the global market. But they will also have to allow time to bring recovery to the battered Asian base oils market.

Jasmine Khoo is the markets editor for Asia base oils, polybutylene terephthalate and metallocene linear low density polyethylene. She is based in the ICIS Singapore office

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