Asia Base Oil Price Report（AUGUST 2, 2019）

Rising base oil inventories and lackluster demand continued to affect pricing and business in Asia, with a number of producers looking at opportunities in other regions to mitigate some of the pressure.

 

However, participants reported that most base stock segments were well-supplied in Europe and North America – the two main target areas for Asian exports – and suppliers were therefore exploring other options such as South America.

 

Demand in Brazil showed a significant improvement during the first half of the year, compared to the previous year, but it seems that it has since fallen off slightly. However, with the summer in the Southern Hemisphere just around the corner, and lubricant manufacturers starting to prepare for the busier driving season, suppliers were hopeful that new export opportunities would present themselves.

 

Base oil and lubricant production in Brazil has also been affected by socio-political turmoil, and there are currently discussions that the government is considering the sale of several state-owned refineries, including two base oil plants (for more details, see “Brazil Selling Refineries with Base Oils,” in the July 31 edition of Lube Report Americas).

 

Mexico and Argentina were also seen as potential markets for exports, but many United States producers already have regular contract business set up in those countries and are likely to protect their market share. Nevertheless, there were rumblings that a Middle East supplier was looking at opportunities in Mexico, since the producer’s exports into China have diminished slightly over the last couple of months.

 

The relatively fresh inappetence of Chinese buyers for imported base stocks stems from the start-up of several new base oil units in the country.

 

While it may take some time for the local products to obtain approvals and gain acceptance in the Chinese market, and for the new plants to run smoothly and attain full operating rates, it was heard that the added capacity was affecting established trade exchanges with regional suppliers from Taiwan, South Korea and Singapore, and deep-sea suppliers such as Russia and the U.S. “What is especially alarming is that China’s new [API] Group II and Group III refineries will make this a permanent situation,” a source noted.

 

Regional producers have reacted to the oversupply conditions and thinning margins by trimming operating rates. It was heard that ExxonMobil was running its Group II production line on Jurong Island, Singapore, at 80 percent since early July, and producers Formosa in Taiwan, and Hyundai Shell and S-Oil in South Korea had reportedly cut run rates by at least ten percent, although there was no producer confirmation forthcoming. Sources said that they would be very surprised if the rates had not been adjusted at these plants.

 

Oversupply conditions were expected to continue weighing on trade opportunities and prices in the near future. Base oil and lubricants producer S-Oil predicted in an earnings report last week that demand would begin to catch up to supply in 2020 and 2021.

 

Unless a major unexpected event were to happen, the imbalance will continue to impact the global base oils business, sources said.

 

“In 2017 the market was almost as oversupplied as it is in 2019, but in 2017 the Shell GTL plant went down, there was a big fire at the Wakayama refinery and the hurricanes devastated the U.S. Gulf. Prices soared,” a source commented.

 

The base oil producers who are most affected by the slowdown in demand and the supply overhang are those that do not have integrated operations where they can provide base stocks to their downstream lubricant operations, sources said.

 

Meanwhile, activity in India was expected to regain some of its strength, following the end of the monsoon season, and indeed there were reports of discussions about upcoming shipments from the U.S. and the Middle East. Group I supply in India has tightened as imports from Iran have been thwarted by international sanctions on Iranian exports and financial transactions, and Indian buyers were heard to be on the lookout for alternative sources of product.

 

Asian spot base oil prices remained exposed to downward pressure due to the current long supply conditions and fluctuating feedstock values, but numbers were largely unchanged as August shipments discussions got underway.