Base oils 2010: Asian base oil producers are expanding on the global market

Investment in refinery capacity has seen South Korea and Taiwan emerge as major players on the growing Asian base oils market and in export markets

ASIA REMAINS not only the fastest growing base oils market in the world but also a global producer and supplier of high quality base oils that exports to the world markets.

On one hand, the dramatic growth in automotive and industrial output in countries such as India and China have made Asia a major draw for base oils. On the other hand, world-scale Group II and III base oil refineries in South Korea and Taiwan have firmly established Asia as a global high-quality supplier.

In fact, Asia has become a supply hub of higher quality oils.

On a global basis, paraffinic base oils supply has been dominated by the big oil majors, namely US-based ExxonMobil and Chevron/Caltex, and Anglo-Dutch Shell, as shown in the left-hand chart below. However, if only Group II and III base oils are considered, the picture looks somewhat different (see right-hand chart). Here the Asian base oil producers, especially the South Korean players, have grown more important and rank among the top five producers in the world.

With close to 3.5m tonnes/year of base oils capacity, South Korea is definitely a production hub of Asia. Three large refiners based in the region – SK Energy, S-Oil and GS Caltex – are the major producers of Group II and Group III base oils. The three not only compete in world-scale base oils production but also in most other refined products such as fuel oils and gas oil. Besides catering to in-house requirements from lubricant units, they are large merchant sellers of base oils.

South Korea now has the technology and economy of scale for base oils production and export and wants to remain the largest in this area, says one of the Korean majors. “Asian economic growth has led to grassroots refining investments in Asia including for fuels, lubes and petrochemicals,” says Amy Claxton, an industry veteran and consultant with My Energy. This is unlike the US where no grassroots refinery has been built in decades, says Claxton.

Additionally, the better quality crude processed in places like South Korea has meant that hydrocracker bottoms have been available for Group II/III base oils production, she adds.

According to South Korean trade statistics, the country exported 2.83m tonnes of base oils in 2009, worth around $1.3bn (€922m). The top five export destinations included not only India and China but also the US and Western Europe.

According to industry estimates, SK Energy remains the biggest exporter to the West, especially for Group III base oils, while GS Caltex is one of the largest exporters to Asia. S-Oil exports to both Asia and the West. In general, South Korean producers are more significant merchant exporters than other oil majors who have large captive requirements.

The other centers of production of Group II/III base oils production are Malaysia and Indonesia, where Petronas and an SK Energy/Pertamina joint venture operate respectively.

“The waxy and high paraffinic quality of crude available in this region in crude oils like Minas and Tapis makes it suitable for Group II/III production,” says Joe Rousmaniere of Petronas.

Producer Formosa, of Taiwan, is the latest entrant in the supply picture for Group II base oils. Its 520,000 tonne/year base oils refinery using ExxonMobil technology started up in late 2008 and has been supplying to the Chinese and other Asian markets.

What is obvious from the charts and discussions here is that China and India are not significant producers of higher quality base oils, but continue to grow as large importers of Group II/III oils.

Meanwhile, Singapore remains a major regional centre of base oils production. Both ExxonMobil and Shell have base oil refineries here, although only ExxonMobil produces Group II base oils. However, a large part of ExxonMobil’s base oils production is shipped to China for captive downstream blending use by the company. As such, limited amounts are available for the merchant market.

Singapore exported around 2m tonnes of base oils in 2009, of which nearly half went to China; the rest went to other Asian destinations such as India, Thailand and also to Australia. Singapore was not a significant source to markets outside Asia, unlike South Korea, which exports globally.

Going forward, we expect to see new capacities or capacity expansions for Group II/III base oils in South Korea over the next five years. Asia, along with the Middle East, will cement its position as a major supply base, especially with the start-up of Shell Qatar’s gas-to-liquids base oils facility, expected around 2012.

Some smaller Group I plants in Asia might also become uneconomical and shut down in countries such as China and India. There could also be some conversion of Group I plants to Group II – for example, India’s HPCL is converting part of its 335,000 tonne/year Group I refinery in Mumbai to Group II. By the middle of 2010, the refinery will produce around 200,000 tonnes/year of Group II base oils.

ASIA AS A MARKET
China remains the engine of growth in the Asian base oils market. Chinese car sales in 2009 totalled 13.6m units, overtaking that of the US to become the world’s largest car market. This has boosted Chinese base oil demand for automotive lubricants, which are estimated to account for over 50% of base oils consumption. Additionally, the impressive industrial production recovery in China in 2009 has kept growth in industrial lubes strong.

China imported 1.7m tonnes of base oils in the first 11 months of 2009 and is expected to end the year with over 1.8m tonnes of imports. This represents a growth of above 33% over 2008, when the country imported 1.35m tonnes of base oils.

While many blenders in China used Group II/III base oils initially because of better regional availability, increasingly the higher quality requirements for automotive lubricants are driven by original equipment manufacturers for Japanese/US and European automotive brands. The top three car brands in China are General Motors (GM), Volkswagen and Toyota, with GM alone selling 1.8m cars and trucks in China during 2009. This should give a boost to higher quality factory fill lubricants in the country.

India is also a large base oils market – albeit with slightly different characteristics to the Chinese market, say Asian sellers. Nearly a third of Indian base oils demand comes from specialty oils, such as white oil, transformer oils and petroleum jelly. This makes India a big market for Group II/III oils, particularly of South Korean origin.

Automotive and marine applications form a lesser part of demand in India than markets like China – with some regional sellers placing the share of automotive lubes in the total base oils demand at around 40%.However, the current focus in India is on small cars costing less than $12,000, which will aggressively drive the car population and therefore lubricant sales, says Milind Phadke, consultant with the US-based Kline Group.

In 2009, India imported around 1m tonnes of base oils, of which nearly two-thirds were Group II/III of South Korean origin. Group II/III base oils were also imported into India from US sources.

IMPACT ON REGIONAL PRICING
The growth in the number of plants in Asia has made the market place more price-competitive and the situation is made worse given the fact that Group II supply exceeds technical demand and Group I plants persist despite technical obsolescence, says Phadke. This has meant that pricing of Group I and Group II base oils in Asia has tended to converge in times of normal supply.

But, this much is certain, a large part of base oils consumption growth in Asia will move to Group II and III in the coming years – driven either by technical needs or simply better supply.

Anu Agarwal is a senior editor for ICIS pricing. Based in Singapore, she covers base oils on a regular basis.