Asia base oils subdued, prices may soften if crude declines

SINGAPORE (ICIS)–Asia base oils market is subdued with both sellers and buyers staying away because of an ongoing weak economic situation in China, lacklustre downstream demand and uncertainty over the near-term price outlook, market sources said on Friday.

China, which is the world’s second biggest economy, is targeting a 7.0% GDP growth this year, down from last year’s 7.4% growth – a 24-year low.

The situation for base oils may worsen if the crude oil futures – which have also contributed to the bearish market sentiment – decline any further. Prices which have been supported by tight supply may see a reversal when a regional producer restarts its base oils plant next month, they added.

“Personally for us, downstream demand was observed to have fallen by around 30% from earlier months,” a China-based seller said noting that weak economic situation in the country and the stock market plunge have contributed to the weak demand.

Benchmark Shanghai Composite Index plunged 8.5% – its biggest one-day decline in more than eight years – to close at 3,725.56 on Monday 27 July. Earlier about 30% of the value of Chinese shares had been wiped out since mid-June this year.

A separate northeast Asia-based buyer echoed similar sentiments in Mandarin: “We are not in a hurry to procure base oils as the downstream demand is even slower than what it was in the last month.”

“Since we are not enquiring, refiners are also not actively offering,” the same buyer added.

Most traders and buyers said that since they were displaying lukewarm buying interest due to concerns over margins, inventory levels and near-term price movement, it was understandable that refiners would adopt a cautious approach.

“These refiners are already holding on to limited cargoes. It doesn’t make sense for them to rush into the spot market to offer, especially if buyers are poised to negotiate price levels down due to bearish market sentiment,” a south-east Asian buyer said.

While lower prices will make it easier for traders and distributors to sell cargoes, the existing snug supply conditions among Asian refiners do not allow for prices to come down easily, a China-based distributor said.

“With refiners unwilling to cut prices due to tight supply, and buyers reluctant to increase buying ideas due to sluggish demand, the market remains in this stalemate condition,” the distributor added.

According to ICIS data, Group I SN500 and Group II 500/600N spot prices in the Asian market have largely remained stable-to-firm over the course of the last two months.

Market sources said that spot prices held up against downward pressure, exerted by pessimistic economic factors and slow cargo uptake among buyers, because of support from snug spot availability in the region.

Sellers were firmly maintaining offers, while buyers who were in need of replenishing inventories had to purchase at higher price levels.

However, with a key northeast Asian Group II refiner due to return from scheduled shutdown maintenance in August, the tight spot supply situation is expected to alleviate soon.

Some market players added that if crude oil futures extended declines going forward, it was likely for base oils spot prices to soften in tandem going forward into the second half of August, when procurement activity for September and October takes place.

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

Focus article by Jasmine Khoo