Global finished lubricant demand isn’t keeping up with expanding base oil supply, threatening the cash margins of mineral base oil producers, officials at Kline & Co. said in a webinar last week.
Industry analysts pegged global lubricant demand – excluding marine lubes and process oils – at approximately 36 million metric tons per year in 2018. Meanwhile, nameplate base oil production capacity soared to over 60 million metric tons, according to LubesnGreases 2019 Guide to Global Base Oil Refining.
That glut is squeezing base oil margins, according to Kline, a Parsippany, New Jersey-based consulting firm. [API] Group I, Group II and Group III base stocks recorded serious reductions in their margins in 2018, Project Manager Anuj Kumar said.
“This is primarily due to stagnant finished lubricant demand and a rapid expansion of Group II supply,” Kumar continued. “When the base stock demand is not growing but were adding more capacity, if the commensurate amount of capacity is not shut down it invariably impacts the margin for base stocks,” he said.
Kline represented the decline in margins using hypothetical plants to simulate a real market scenario. For Group I Kumar used a European Group I base oil plant with capacity to produce 10,000 barrels per day as a hypothetical example, stating that its cash margin per barrel dropped by more than half from 2017 to 2018. A 15,000-b/d Group III plant located in the Asia-Pacific region saw a similar drop. Meanwhile, a 20,000-b/d Group II plant along the United States Gulf Coast saw its margins drop roughly 20 percent.
This has continued into 2019, were still seeing lower margins, said Kumar.
Kline’s conclusions were generally supported by earnings reports of some large merchant base oil suppliers. S-Oil, a major base oil refiner headquartered in Seoul, reported base oil margins of 15.8 percent for 2018 compared to 26 percent for 2017. The company operates a base oil plant in Onsan, South Korea, with capacity to make 20,800 b/d of Group III, 20,500 b/d of Group II and 500 b/d of Group I.
In its most recent earnings report, S-Oil reported base oil margins of 12 percent for the second quarter of 2019, down from 19.3 percent for the same period of 2018. That report also calculated that the product spread in Asia between base oil and high-sulfur fuel oil prices averaged $26.30/bbl in the second quarter of 2019, down from $41.30/bbl for the same period of 2018, according to the company’s earnings report released in July. The spreads the company listed are aggregated numbers including all three API groups.
SK Lubricants, another South Korean base oil refiner and a subsidiary of SK Innovation, doesn’t disclose margins for its base oil, but it reported that its operating profit dropped 38 percent for the second quarter of 2019, despite a 3.5 percent year-over-year increase in sales volumes.
In Europe, Group I base oil plants could be rationalized, both due to the overhang of capacity and the looming implementation of the International Maritime Organizations lowered sulfur fuel cap, set to go into effect in 2020, said Kumar. The global market as a whole will be impacted by the new rule, but European Group I facilities are especially vulnerable, he said.
Group II plants in the U.S. have so far been more resistant to squeezed margins. Vince Gillooley, senior vice president of base oil supplier Chemlube, told Lube Report in July that U.S. producers have managed to hold their prices higher than in other regions, though it has made the market tight and tamped down exports.