OUTLOOK ’18: China Q1 base oils to gain traction on lesser regional supply

Source: ICIS News


SINGAPORE (ICIS)--China’s domestic base oils market is likely to gain upward momentum during the first quarter of 2018 from reduced imports amid a slew of unit turnarounds in Asia.

A quite a few number of plant maintenance in Asian countries is expected during March-April this year, which may result in lower cargo availability into China, where imports make up around 36% of total base oils supply.

Unit turnaround schedule in Asia (2018)
Location Refiner Capacity (tonnes/year) Products Turnaround period
South Korea SK 2.2m Group II/III base oils 10 Mar-10 Apr
South Korea S-oil 880,000 Group III base oils Mar-Apr
Malaysia Petronas 330,000 Group III base oils Late Mar-late Apr
China Sinopec Shanghai Gaoqiao Petrochemical 700,000 Group I/II base oils Mar-May
Taiwan, China Formosa Petrochemical Corporation (FPCC) 600,000 Group II base oils Jul-Aug
China CNOOC Huizhou 400,000 Group II base oils Early Sep-late Oct
Source: ICIS

The maintenance plan at FPCC during July-August, which is a traditional demand lull season for low-viscosity base oils, is likely to exert limited impact on the domestic market.

FPCC’s base oils supply accounts for 14-15% of China’s total imports.

Downstream lubricant producers may show higher restocking interest in early March following a week-long holiday in China, further tightening domestic supply during the first quarter.

China will celebrate its Lunar New Year during 15-21 February 2018.

A new Group II base oils unit in Shandong, north China is scheduled to start trial runs in the first quarter next year, but it may take some while before the plant reaches stable output.

China’s base oils capacity expansions
Location Refiner Capacity (‘000 tonnes/year) Products Expected start-up
North China Qingyuan Petrochemical 800 Group I/II base oils Q1 2018
Northeast China Hengli Petrochemical 540 Group II base oils End-2018/early 2019
Source: ICIS

China will focus on expanding Group II/III base oil capacities in the next few years, mostly by independent refiners because of higher demand for better quality base oils.

Generally end-users prefer Group II/III base oil, replacing Group I in the lubricant blending formula. At the same time, the profit margin to produce base oil is better than producing gasoil normally.

However, state-owned giants PetroChina, Sinopec and China National Offshore Oil Corp (CNOOC) have yet to announce any new unit start-up plans.

Meanwhile, the proportion of Group I base oils supply will gradually decline in China, as more refiners opt to produce Group II/III volumes of higher performance.

China’s proportion of base oils supply by spec
Spec 2017 2018 (E)
Group I base oils 22% 21%
Group II base oils 43% 45%
Group III base oils 11% 12%
Naphthenic base oils 12% 12%
Off-spec base oils 11% 11%
Source: ICIS

As compared to 2016 when base oils got a boost, domestic base oils market in China has gone through a largely flat year during 2017, with overall prices stable-to-lower.

During October 2015 to December 2016 China’s base oils consumption had been boosted by the country’s policy incentive to halve the purchase tax on cars with small engines to 5%.

However from 1 January 2017 the government raised the purchase tax to 7.5% on low-emissions autos and those with engines that are less than 1.6 litres in size, dampening buying interest in such vehicles and thus impacting the base oils consumption in China.

Demand from vehicle lubricant producers, however, may remain relatively robust in the coming year in response to the country’s steady growth, albeit slowing down, in passenger cars consumption.

China’s passenger car sales volume increased by 1.91% year on year to around 22.09 million in the first eleven months of 2017, according to data published by China Association of Automobile Manufacturers.

Industrial lubricants consumption, meanwhile, may continue to be dampened by the Chinese government’s move to tackle environmental problems that may affect further downstream mining, iron and steel production.

Outlook article by Cao Hang