China Still Key to Base Oil Puzzle

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China Still Key to Base Oil Puzzle
Chinese rail tank car in Anning District. © Uwe Aranas / Shutterstock.com

China’s economy is not expanding as fast as it has in recent years, but the country is still a key base oil player in Asia, despite other nations gaining in importance on the global stage.

Addressing the 16th ICIS Asian Base Oils and Lubricants Conference held here last week, ICIS Base Oils Senior Editor Matthew Chong noted that countries such as India were showing stronger economic growth rates than China, but the country still dominates much of the base oils trade in the region.

China’s GDP growth is forecast to be 4.8% in 2024, down from an estimated 5.2% in 2023, according to the World Bank, and there are no major stimulus measures in the pipeline to boost the energy and petrochemical sectors. In comparison, as of June 11, 2024, the World Bank projects India’s GDP to grow at a steady 6.7% per year on average for the three fiscal years beginning in 2024/25. 

Both China and India suffered serious economic setbacks due to the coronavirus pandemic, as did most other Asian nations. After a fairly lackluster first half of 2023, Asian base oil demand finally picked up in the second half of the year, with China responsible for a large amount of this growth due to healthy post-pandemic economic activity.

Spare Capacity

The ramping up of base oil demand was not necessarily reflected by Chinese API Group II and Group III refinery run rates between 2023 and 2024, however, as operating rates remained low amid overcapacity, Chong noted. China tried to expand base oil production aggressively, with several new base oil plants completed in China over the last five years, but many of them have been running at reduced rates since their inception. Following a strong post-pandemic rebound, Chinese base oil consumption started to slow. Looking forward, Group I base stocks will slowly be phased out and replaced with Group II and Group III grades, according to Chong.

No new Group I plants have been built in China in recent years, except for an expansion at the PetroChina Fushun Group I plant, which has an existing Group I capacity of 260,000 metric tons per year and is scheduled to start up an additional 70,000 tons/year of Group I capacity in the third quarter of 2024. The added capacity will only be bright stock, Chong said.

Production rates at the existing Group I plants in China have remained between 80% and 90% since 2019 and were anticipated to stick to similar levels into 2026. Production is being driven by robust Group I demand from the industrial, marine, railway, agricultural and heavy-duty transportation segments amid Group I plant rationalizations in the region. “However, Group I demand is projected to shrink from 2025 on,” Chong noted.

Group II refinery run rates, on the other hand, have been hovering at around 60% since 2019 and were not expected to show much improvement over the next two to three years. Most of the new plants built in China produce Group II grades.

There have been fewer Group III plant additions and run rates at these plants tell a slightly different story. In 2020, operating rates peaked at around 70-80%, but then plummeted to below 60% at the height of the coronavirus pandemic in 2021. Rates have recovered slightly but were expected to languish close to those of Group II plants at around 60% capacity over the next two to three years. Some Group III producers, such as Hainan Handi, have been trying to promote exports to gain a more balanced supply and demand position.

India Refinery Spree

By contrast, several base oil projects have been expedited in India as the country pushes to attain self-sufficiency. Indian Oil Corporation plans to bring an expanded Group II/Group III plant on line in Haldia in August of this year. The existing Group II capacity of 235,000 tons per year will be expanded to 480,000 of combined Group II and Group III capacity. A new IOC plant in Panipat is expected to start up in 2025 and will have a Group II/Group III nameplate capacity of 525,000 t/y. A third IOC project in Gujarat is expected to bring 235,000 t/y of new Group II/Group III capacity in 2025 as well.

Also in India, Hindustan Petroleum Corp. Ltd. will expand its Mumbai refinery, which currently boasts 450,000 t/y of Group I/Group II capacity, to produce an additional 150,000 t/y of Group II/ Group III base oils.

Other projects in Asia include an ExxonMobil Group II capacity expansion in Singapore which appears on track to start up in 2025, while Petronas has plans to debottleneck its Group III unit in Melaka, Malaysia, by 2029. Back in 2020, Pertamina announced plans for a new Group II/Group III plant in Indonesia which will use Chevron Lummus Global technology, but a start-up date has not been confirmed yet.

In the Middle East, Luberef is expected to bring additional Group II/Group III capacity of 300,000 t/y at its Group I/Group II plant in Yanbu, Saudi Arabia, in 2025.

“Some projects are likely to be delayed or cancelled, while more Group I units are expected to be phased out,” Chong warned.

Reducing Reliance

The main purpose of building so many base oil plants in China since 2019 was for the country to stop relying so heavily on base oil imports, which exposes prices to international price fluctuations. Indeed, Chinese import volumes have shown a steady decline over the last five years, led by sharp drops in imports from South Korea, Singapore and Taiwan given ample local supply, particularly of Group II grades. Group III imports from the Pearl Shell/Qatar Petroleum gas-to-liquids plant appear to have bucked the trend, Chong observed. China is also still dependent on Group I bright stock imports, which might be the leading cause of having to remain a net importer in the long term.

One of the main exporters to China is Taiwan, although volumes imported from the only Group II producer in that country, Formosa Petrochemical, have dropped significantly in 2024 compared to previous years. This was attributed to ample local supply in China and the re-introduction of a 6% tariff on Taiwanese base oil imports as of June 15, 2024. “The tariff may force more Taiwanese cargoes to move elsewhere—India, the United Arab Emirates and Southeast Asia are likely targets–while South Korean and other Group II refiners may shift their focus to China,” Chong observed.

He also explained that domestic base oil demand has not kept up the pace with the growing production capacity of certain grades in the country, and the market is saturated, forcing refiners to actually seek export outlets.

China Global Base Oil Prospects Positive

China has the advantage of being able to import discounted Russian crude oil, which is priced lower due to international sanctions because of Russia’s war on Ukraine. Chinese refined products can therefore be competitively priced compared to those produced in other export hubs such as South Korea.

Nevertheless, imports are still significantly outpacing exports. Between January and April 2024, China imported a total of 621,000 tons of base oils and exported only 61,000 tons, according to ICIS data. Singapore remains China’s top export destination because of Sinopec’s downstream operations in that country. China’s search for export outlets is hindered by several factors, among them unfavorable tax regimes and state-owned refiners holding an advantage over private exporters. Hainan Handi’s plant is located in a Free Trade Zone, but there have not been many exports from that facility over the past year.

Even though China’s base oil market has gone through a tumultuous period, the overall prognosis is positive as base oils demand is forecast to gradually increase in the next few years. Downstream lubricants consumption will receive a boost from a recovery in the automotive sector, “with consumption of the Group II 150 neutral grade to rise on an expected uptick in passenger car usage,” Chong predicted.

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