China base oil imports may fall in July amid rising prices

SINGAPORE (ICIS)–China’s base oils imports are likely to fall in July, as rising prices for Group II base oils have narrowed the arbitrage margin and downstream lubricant producers have replenished ample inventories.

Import prices for Group II base oils on CFR (cost & freight) China basis have posted a relentless rise, after bottoming out in mid/late May.

On 26 June, import prices for Group II base oil 150N averaged $400/tonne CFR China, up by $50/tonne from the trough set in late May, and those for Group II 500N averaged $565/tonne, up by $65/tonne from the low in mid-May, ICIS data showed.

Average CFR China prices for Group II base oils

Most small and medium-sized lubricant producers in China avoided building up stocks in March-April, when base oils prices were higher than crude values.

They therefore took advantage of the lower base oils prices in May-June to purchase in a large amount of imports.

Increased lubricants sales amid the recovery in the industrial and auto sectors also fuelled the buying spree for base oils imports.

China’s auto market staged further recovery in May, with auto production and sales both picking up.

Domestic auto output reached 2.187m units in May, up by 4.0% month on month, while sales hit 2.194m units, up by 5.9% month on month, according to data from China Association of Automobile Manufacturers (CAAM).

The year-on-year growth in output and sales at 18.2% and 14.5% respectively was 15.9 percentage points and 10.1 percentage points higher than that registered in April, the data showed.

Total auto production and sales in January-May dropped by 24.1% and 22.6% year on year respectively, but was 9.3 percentage points and 8.5% percentage points lower than that in January-April.

The Purchasing Managers’ Index (PMI) for China’s manufacturing industry stayed at above 50 in March-May, indicating an expansion in manufacturing activities, although the index for May dipped by 0.2 percentage points month on month to 50.6%.

Source: China’s National Bureau of Statistics

According to mainstream importers in China, Asian refiners raised based oils spot prices, with their inventory pressure eased in June, as demand picked up after many southeast Asian countries lifted their national lockdown measures against the coronavirus outbreak.

China’s base oils prices also regained some ground but the growth was lower than the incremental import costs, thus narrowing the arbitrage margins.

This has subsequently dampened buying interest in July base oils imports.

Domestic supply is poised to see a sharp increase, as Shandong Jincheng Chemical started up its 600,000 tonne/year Group III base oil plant in late June and some Group II base oil plants have resumed operations from routine maintenance.

China’s imports of base oils are likely to drop in July, due to increasing domestic supply, rising import costs and relatively high inventories at downstream lubricant plants.

Focus article by Whitney Shi