Asia Group II base oils to extend decline on bearish market

Focus story by Jasmine Khoo

SINGAPORE (ICIS)–Spot prices of Asian Group II base oils are poised to extend falls registered in the third quarter as the market is awash with supply amid lacklustre demand, industry sources said on Tuesday.

On 3 October, high viscosity 500N prices were assessed at an average of $950/tonne FOB (free on board) NE (northeast) Asia, down by 7.8% from early July, according to ICIS data.

Light grade Group II 150N prices registered an 8.9% decline over the same period to $925/tonne FOB NE Asia, the data showed.

Group II base oils supply surged in the third quarter following start-ups of new units globally, dampening buying appetite, market sources said.

Producers have lowered offers but failed to entice buyers. Most base oils importers adopted a wait-and-see approach on the market as they expect prices to fall further.

With a new northeast Asian Group II refiner supplying cargoes to Asian buyers, other Group II refiners had started to actively offer material at competitive spot prices to relieve mounting inventory pressure, said market players.

Stiff competition was observed among regional and global base oils suppliers, prompting buyers to retreat to the sidelines, particularly those importers that do not have urgent needs to restock inventories.

In the Indian market, competition was stronger among sellers of US and northeast Asian material, they said.

Offers into China and India were reduced during September, ahead of the countries’ holidays to stimulate buying interest and encourage restocking activities, market sources said.

China’s markets were closed on 1-7 October for its National Day celebration, while India will observe Diwali or Festival of Light holiday on 23 October.

Taiwanese and Indian producers have cut their domestic list prices for Group II material as suppliers’ inventories are rising while demand has remained tepid.

But these lower offers failed to trigger active trades, market sources said.

Buyers may not be actively procuring material because of sluggish demand from downstream sectors such as lubricants, some regional buyers said.

In smaller markets like Singapore, trading activity for Group II on an ex-tank basis was also  slow, industry sources said.

“We are not seeking cargoes actively now, as inventories for base oils are ample, and the downstream lubricants market is very slow. Both feedstock and finished lubricants are hardly moving from the inventories,” a Singapore-based buyer said.

In Taiwan and China, domestically available cargoes pose strong competition to import material, market players said.

“Buying import cargoes in large volumes of at least 1,000 tonnes is just not an option for us, as the downstream sector is doing very badly, a northeast Asia buyer said.

“As much as possible, we will try to buy domestically. This would also allow us to purchase cargoes in smaller lots, he said.

“For import cargoes, prices would have to be competitive with local pricing before we can accept import material,” the buyer said.

In the Middle East, which exports base oils, the Eid ul-Adha holidays in early October and an existing supply overhang of Group I material continued to weigh on buying interest for Group II spot material, industry sources said.

Group I SN500 material can replace up to 90% of downstream uses for Group II 500N.

Amid declining prices, producers may opt to cut run rates at their facilities to manage their output more effectively, market sources said.

“Our company is still considering if we would cut operating rates further, should the current weak market situation persist,” a northeast Asian Group II refiner said.

Buying interest is not expected to improve by much with the return of Chinese players into the market by the middle of this week.

In China, demand for high-viscosity grade material 500N typically slackens at the onset of the winter season in the fourth quarter, as cold conditions might cause freezing of this base oils grade.

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