China seeks base oils from Europe, US on low Asia supply

SINGAPORE (ICIS)–Chinese importers have been seeking base oils from Europe and the US since April as supply of high-viscosity Group II grades in Asia is tight, industry sources said on Tuesday.

Taiwanese producer Formosa Petrochemical Corp (FPCC), which is a major supplier to China, cut its Group II term supply to China by half for June ahead of a turnaround at its plant late next month.

South Korean refiners also reduced their Group II spot supply to China in view of robust demand from southeast Asia and India, market sources said.

Tight supply, together with robust demand from downstream lubricant producers, supported Group II base oils prices in China for the whole of April.

Spot prices of N150 grade gained yuan (CNY) 225/tonne from end-March to CNY6,275/tonne, while the N500 grade increased by CNY650/tonne over the same period to CNY8,400/tonne, according to ICIS data.

Chinese importers have been aggressive in procuring cargoes from the spot import market as they generated as much as CNY1,000/tonne in margins last month, industry sources said.

A deal was concluded last month with US producer Chevron for about 10,000 tonnes of Group II base oil supply, with the cargoes scheduled to arrive in China in early June, according to major Chinese importers.

Market sources said that base oils’ import cost is currently high, but Chinese buyers are betting that Asia’s supply of Group II base oil will remain short in May-June amid a seasonal spike in demand from lubricant companies in China, the importers said.

Because of surging prices of Group II base oils, some lubricant producers have taken to substituting them with Group I grades, market sources said.

Group I SN500 is currently priced lower than the Group II product by around CNY1,000/tonne, according to ICIS data.

China relies on supply of high-viscosity Group I base oils from southeast Asia following the shutdown of domestic plants by energy giant PetroChina due to poor margins.

But supply in southeast Asia is also tight amid a pick-up in domestic demand, prompting Chinese importers to seek cargoes from Europe.

A deal has been concluded for the import of 8,000 tonnes of Group I SN500 from a refiner in Poland, with the cargo scheduled to arrive in China in late June, according to the importers.

Chinese importers were not so concerned about the current lack of margins, as import costs were almost the same as the mainstream traded prices of base oils in China.

They expect supply to remain tight in China next month, market sources said.

Some market players, however, raised concerns that demand could weaken in June, when the traditional lull in consumption starts.

If more deals are concluded in May and imports from Europe and the US remain large, stocks in China will climb in July and weigh on prices, they said.

Focus article by Whitney Shi

($1 = CNY6.48)