INSIGHT: China base oils demand on track for recovery in 2023 post-reopening
SINGAPORE (ICIS)–China’s base oils demand is expected to recover in 2023 due to an upbeat automotive recovery outlook, while rising demand and ample supply for domestic Group II grades could further reduce dependency on imported cargoes.
Following the easing of strict COVID-19 lockdown restrictions, China’s production and sales of vehicles are also expected to improve from 2022 hence the demand for vehicle-use lubricants, the major downstream consumer of base oils. In addition, demand for low-viscosity base oils is expected to extend gains in 2023 driven by higher passenger car sales, while the demand for high-viscosity base oils may decline on lower commercial vehicle sales.
CHINA VEHICLE SALES UP IN
China’s vehicles sales reached 1.98m units in February 2023, up by 13.5% year on year and 19.8% month on month, industrial data showed on 10 March, mainly driven by governments’ incentive policies as well as carmakers’ price cuts.
The February production stood at 2.03m units, an increase of 11.9% year on year and 27.5% month on month, according to China Association of Automobile Manufacturers (CAAM), while total vehicle sales in January-February decreased 15.2% on year to 3.63m units.
Downstream lubricants producers have preferred domestic Group II base oils to imported ones, due to good quality, competitive prices as well as consistent and stable supply. This is likley to extend into 2023 further reducing China’s import demand for Group II base oils in 2023. Import demand for Group I and Group III may remain stable to firmer.
In 2022, China’s base oils apparent consumption is likley to have tumbled from 2021, mainly because the COVID-19 resurgence across the country hit economy downstream demand. Most lubricants producers said their annual lubricants sales volumes in 2022 were likely to be 30-40% lower compared with 2021.
Given lacklustre domestic demand, China’s base oils imports have continued to lose ground while exports continued to rise in 2022. The trend may persist in 2023.
2022 CHINA BASE OILS IMPORTS DECLINE,
China’s base oils imports were more than 1.78m tonnes in 2022, down by 16.2% year on year, data from the ICIS Supply & Demand Database showed, meaning that imported Group II grades are being replaced by domestically produced base oils.
However, China exported around 143,557 tonnes of base oils in 2022, up by 28.8% year on year, showing that demand for domestic Group I and Group II base oils had risen in the Asian market.
Demand for base oils has improved significantly compared with the level before the Lunar New Year holiday (21-27 January), with downstream lubricant oil producers making purchases. Lubricant oils producers said their orders from end-users this year have improved from the previous year, as end-user demand for lubricant oils has been recovering with the gradual lifting of stringent COVID-19 restriction policy since December 2022.
China’s base oils demand from downstream lubricant oils producers is expected to remain firm in March, as most of lubricant companies have started building up feedstock base oils in preparation for the upcoming traditional oil blending peak season in March.
However, supply of Chinese local Group II base oil is set to slump amid plant turnarounds. The supply gap for Group II ones is expected to be filled by increasing import arrivals since late-February amid hefty import margins. Hence, overall supply and demand for the grade are poised to be relatively balanced in March.
CHINA BASE OILS TRADE DEFECIT TO SHRINK
In the mid- to longer-term, Group II import volumes from South Korea and Taiwan, which constitute half of the total base oils imports in 2022, according to ICIS Supply & Demand Database, is expected to resume its downtrend when turnarounds at Chinese Group II units end by mid-2023.
Chinese refiners are likely to look for new export destinations, as evident from the surge in export volumes in the past couple of years, albeit from a small base.
Total base oils exports from China jumped year-on-year by around 327% and 29% in 2021 and 2022 respectively, the ICIS Supply & Demand Database showed.
Chinese state-owned refiners have an advantage over privately owned ones when it comes to base oils exports due to the lack of rebates.
State-owned refiner Sinopec has lubricants manufacturing facilities in Singapore and a large portion of its exports to Singapore are for its own captive use. It is able to get some rebates from the import duties on its imported upstream crude oil when it exports its downstream base oils. This is known as re-processing trade in China and it applies to most petrochemical products.
China’s base oils exports to Singapore alone constitutes 70% of total exports in 2022, while significantly more volumes have also found their way into India, Malaysia, USA and Russia in 2021 and 2022.
Insight article by Matthew Chong and Whitney Shi
Additional reporting by Fanny Zhang
The 15th ICIS Asian Base Oils and Lubricants Conference will take place on 15 March at the Fairmont Hotel, Singapore. For more information, please visit the event website.
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