China base oils bear brunt of coronavirus; Europe, US unscathed so far

Author: Whitney Shi

2020/02/17

SINGAPORE (ICIS)--Unsurprisingly, the base oils sector in China has borne the brunt of coronavirus restrictions, although a more cautious approach is being adopted by other countries.

In this regional review, the base oils editors at ICIS have assessed the main impact of the outbreak - which has been compared to the SARS epidemic and seen global GDP slashed - as things stand in mid-February.

This ranges from plants which have been shut in mainland China as a direct consequence of the virus to a more sentiment-based reaction which has limited trading activity in the Middle East. So far in Europe and the US, players have largely brushed the epidemic off.

CHINA - DIRECT IMPACT
In China, the coronavirus has scored a direct hit on the base oils market.

On the supply side, some local oil refiners have been forced to lower operating rates. This was done to avoid putting pressure on inventories after transportation restrictions were enforced in some provinces.

However, some refiners have chosen to continue to operate at maximum - taking advantage of lower production costs after a slide in crude prices. Many slashed list prices to encourage sales.

On the demand side, a sizeable number of lubricant companies postponed the resumption of production because many downstream end-users had delayed their return to work.

Demand in Q1 2020 is therefore expected to be quite weak.

For more details on plants affected by the coronavirus, please read this article.

ASIA - YET TO EMERGE
To date, there has been little-to-no effect on shipments to China from other Asian suppliers.

Talk has surfaced of a Taiwanese refiner looking for alternative outlets for its Group II spot cargoes in March because of rising inventory pressures. Almost all of the material that it produced used to go directly to mainland China and most downstream plants were still shut as of mid-February.

South Korean Group II refiners - the main Group II exporters in northeast Asia - have had limited spot availability since the end of last year after cutting production.

Elsewhere, buyers in southeast Asia and India are cautious amid mounting concerns over the spread of the coronavirus and falling crude prices. Most prefer to remain on the sidelines and see how things develop in March.

MIDDLE EAST - SENTIMENT-LED REACTION
There is unlikely to be any major impact in the Middle East. As in other parts of the world, supply and demand are the key issues.

Prices remain stable-to-firm, with Group I values seeing minor increases due to tighter supply out of Iran.

In the meantime, there is no suggestion that any shipments booked into China are being re-routed to the Middle East. Most players say it does not make economic sense because of the freight rates involved.

However, sentiment in the market is generally cautious as players eye the potential fallout on the broader economy, such as tourism, and worries about possible travel restrictions.

US - PRICES UNAFFECTED
In the US, the coronavirus fallout is not seen as having a significant effect on the market.

So far, prices have been unaffected: posted price increases are sticking and spot values for domestic buyers are firm. A firmer market outlook for finished lubricants is slated for late February/early March.

Supply is described as balanced-to-slightly snug and demand is strong - linked to the uptick in the the finished lubricants segment.

Any likely impact on the US market will depend on whether lower demand for base oils in China pushes supply to the rest of the world.

EUROPE - SUPPLY AND DEMAND STILL KING
In Europe, the market balance is unlikely to be affected - unless the impact of the coronavirus if far worse than originally feared. Pricing has been steady in the face of upstream volatility.

If this is the case, it would continue a trend seen for much of 2019 - when prices failed to be swayed by upstream moves -  because supply and demand remain king.

Ample supply for Group I, in particular, has mitigated any movement higher. February's sharp slide in the price of crude and subsequently vacuum gasoil (VGO) - the main feedstock for base oils - did not filter through in a notable way.

Prices were already painfully low for European refiners, and there was scant room for any more decreases.

At the same time, signs of a reversal in crude prices - on expectations that OPEC will cut output to counter weaker demand from China - had yet to impact on European pricing in early February.

Base oils are used to produce finished lubes and greases for automobiles and other machinery.

Focus article by Whitney Shi, Matthew Chong, Izham Ahmad, Amanda Hay, Vicky Ellis and Samantha Wright

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.

Above image by Vicky Ellis: base oils storage tanks