OUTLOOK ’14: Asia base oils producers brace for tough year ahead

By Junie Lin

BRISBANE (ICIS)–Asian base oils producers are preparing to face significant challenges in 2014 as  new capacities come on stream globally, putting further pressure on already tight margins for refiners, producers and buyers said.

Upcoming expected capacity additions to global supply will be the anticipated first-quarter 2014 start-up of Chevron’s 25,000 bbl/day Pascagoula Group II base oil plant in Mississippi, US.

South Korea’s SK Lubricants and Spain’s Repsol are also expected to bring on line a 13,300 bbl/day Group III base oil plant at Cartagena in Spain in the second half of 2014.

Within Asia itself, China’s Sinopec Maoming is expected to start a 200,000 tonne/year Group II capacity in Guangdong, China in 2014.

Shell and Hyundai Oilbank are also expected to start up a 650,000 tonnes/year plant at Daesan, South Korea, for the production of Group II base oils in the second half of 2014.

In the Middle East, extra supply is also coming from ADNOC’s 100,000 tonne/year Group II 60N and 70N base oils and 500,000 tonne/year of 4,5,6cst of Group III base oils in Abu Dhabi, UAE, slated to come on stream in the first half of 2014.

Given the slew of base oils expansions in the global market, industry players predict that the bearish sentiment in 2013 will continue in 2014.

Most market participants are expecting a strong buyers’ market because of  the oversupply situation resulting from the new capacities, which is likely to further depress Asian refiners’ already tight margins.

Asian base oil producers had already contended with squeezed margins and losses in the second half of 2013 because of oversupply in the region, amid volatile feedstock fuel oil and gas oil prices.

Asian base oil producers in 2013 have long held out against lowering prices by a huge extent, despite the persistently weak demand, because of their slim production margins.

Asian producers might very soon find themselves faced with a choice between selling at negative margins or reducing their plant operating rates in the second half of 2014 as the expansions become more prominent.

On top of the bearish market sentiment, the slowing China economic growth is expected to  hamper overall demand of lubricants.

Lubricants demand from 2013 to 2018 is set to grow by a marginal growth rate of 0.9% in Asia, according to industry sources.

However, some market players said that some of these expansions may be delayed as the downstream lubricant might not be able to absorb all the surplus cargoes at once amid macroeconomic weakness.

Traditional pick-up in the buying interest ahead of the Lunar New Year festivities in late January is also expected to boost restocking in export markets such as Thailand, Indonesia, Japan, South Korea and Taiwan across all grades of base oils.

Restocking activities across Asia-Pacific is expected to gain traction in the second quarter of 2014 as inventories deplete.

In India, a challenging 2013 had made base oil buyers skip all spot purchases in September 2013 on the back of the sharp Indian rupee depreciation, and instead to rely on term purchases and domestic supply.

Indian players said that it is hard to anticipate what will happen in 2014 after a volatile 2013, but mentioned that the extra supply will definitely help them negotiate at lower prices.

India is a major importer of light viscosity base oils.

In the wake of the six-month Iranian nuclear deal with the US and six other nations and easing of sanctions, many market players are waiting for the impact that it will have on the regional base oils market.

While some players said it is too early to see any significant changes, some players said Iranian material may potentially fetch higher prices or compete with other Asian refiners as the country no longer needs to cater the majority of its cargoes to the south Asia and Middle East markets.

Furthermore, the influx of low cost gas-to-liquids (GTL) Group III into Asia is likely to continue exerting downward pressure to the prices of Group III prices in 2014.

Base oils is mainly used to produce engine oil for the auto sector. Other applications include white oil, transformer oil and advanced lubricants.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections