More Imports Forecast for Brazil

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More Imports Forecast for Brazil
An oil-chemical tanker near the port of Santos in Brazil. © Will Rodrigues / Shutterstock.com

Brazil has its own cadre of base oil refineries, but the country is still highly dependent on imports, especially of highly refined mineral oils – a trend that should intensify, an industry expert predicted at the ICIS Pan American Base Oils & Lubricants Virtual Conference earlier this month.

Brazil attracts large volumes of base oil imports every year and will continue to do so in the near future as local production is declining and is not sufficient to cover demand, Claudio Silva, director of consulting firm LubeKem, said during the online event, which was held Dec. 2-4.

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Over the past two years, Brazilian imports averaged over 500,000 metric tons per year. Silva also forecast that imports will hover at a similar number despite the impact of the COVID-19 pandemic and the supply problems that affected a majority of countries this year. Supply remained tight as refiners reduced overall operating rates to adjust to the drop in demand of products such as gasoline and jet fuel.

Base oil imports are also gaining in terms of the percentage of Brazilian demand they meet. In 2020, imports will likely cover about 50 percent of total demand. “It’s a really big number, and it’s expected to increase,” Silva emphasized.

Brazilian state-run oil company Petrobras is the largest base oil producer in the country, but its output has declined for a few years, and it is expected to fall further as production at its main base oil refinery –  known as Reduc, in Duque de Caxias, near Rio de Janeiro – continues to slip.

“Petrobras’ base oil production at Reduc has been falling year after year, from about 11,900 barrels per day in 2013, to around 7,300 bbl/day this year, or about a 40% reduction,” Silva noted.

The plant has a nameplate capacity of close to 12,000 barrels per day (584,000 metric tons per year) of API Group I base oils, according to Lubes’n’GreasesGlobal Guide to Base Oil Refining.

Many factors contributed to the gradual reduction of output at the Reduc refinery. A dearth of investment has prevented upgrades, preventing the facility from keeping pace with the country’s rising demands for finished lubricant performance. In addition, Petrobras faces strong competition from Group II suppliers in the United States.

The facility suffered some technical issues in mid-2020, and base oil output was negatively impacted by a shift to crude oil varieties that are cheaper than Arab light and Basra light, both of which have high base oil yields.

Silva predicted that production at the Duque de Caxias refinery would be even lower next year, and estimated that as a result, imports would probably increase to about 700,000 tons per year from 2022 on. “In my opinion, this is one of the biggest short- and mid-term challenges for lubricant blenders in Brazil, mainly for small and mid [-sized] buyers,” he said.

The main problem is that Brazilian buyers will be more exposed to fluctuations in export prices from other regions. Base oil price spreads reached record highs in Brazil this year; the local pricing of Group I base oils changed from August on and closely followed price variations in the U.S. export market. U.S. export prices jumped in late August, following a spate of production outages and reduced operating rates caused by hurricanes on the U.S. Gulf Coast.

The Group I base oil spread to diesel reached record levels in Brazil this year, but this has also been the case in most regions. “We had a big peak in April, mainly related to the impact of COVID-19 on global oil demand, and since August, the base oil spread in Brazil has been increasing – pushed of course by the global market again – but also by a change of Petrobras pricing rules for base oils that was implemented from August on,” Silva explained.

He also noted that Petrobras’ price increases slightly outpaced the markups of Group I and Group II spot export prices in the U.S., which, together with the lack of supply due to reduced production at the Reduc refinery, naturally had a negative impact on blenders in Brazil.

Despite a strong recovery in the third quarter, Brazilian finished lubricant demand is going to be lower in 2020 than pre-pandemic forecasts and will also finish below overall demand levels registered in 2019.

“Accumulated lubricant demand for the last four quarters, starting in Q4 2019 and up to Q3 2020, will be about 6% lower than the pre-COVID main forecasts,” he said. “We expect a full recovery to pre-COVID levels only by the end of 2022. But of course it could happen earlier.”

Many factors are anticipated to play a role in the base oil market’s recovery, including crude price trends and strategies over the next few months by OPEC and other oil exporting countries that cooperate with the cartel.

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