SHENZHEN, China – Supply fluctuations have overturned the normal order of pricing in Chinas base oil market this year, leading API Group I stocks to cost more than Group IIs and the typical premium for high viscosity oils to nearly disappear.
Projected demand trends should restore the Group II premium over Group I oils, an analyst told an industry conference here this month, but the spread between light and heavy oils could continue to narrow.
After September, prices for low-viscosity Group I base oils will be expected to return to normal, and prices will go lower than Group II base oils, Shi Yunzhi, a base oil price reporting analyst with ICIS, told the CBI Base Oil Summit on Sept. 11.
Traditionally producers of Group II base oils have been able to command a premium over Group I products because the characteristics of Group IIs – higher viscosity index, lower levels of unsaturates, lower levels of sulfur and phosphorus – generally make them advantageous for use in high volume lubricant applications such as engine oils and transmission fluids.
At the start of January, Group II 150 neutrals were bringing approximately RMB 9,200 (U.S. $1,501) per metric ton in China, roughly RMB 120 per ton more than Group I 150 solvent neutral, Shi said. In late April, however, SN150 became more expensive than 150N, and by late July the premium had widened to nearly RMB 300 per ton.
Such situations are not without precedent. Similar flip flops have occurred in the United States periodically, usually after introductions of significant new Group II capacity. Shi cited two factors for the development in China: introduction of new Group II capacity by Chinese independent Hainan Handi Sunshine and Asian producers that export to China; and maintenance shutdowns that curbed production by a number of Chinese Group I refiners.
Group I SN500 and Group II 500N underwent an even greater relative shift. 500N began the year priced a bit above RMB 1,100 per ton, compared to approximately RMB 1,000 per ton for SN500, but in late July prices for the Group II product sank below those for the Group I heavy.
Shi suggested that prices for Group I and II low-viscosity stocks will flip-flop again when Group I refiners catch back up after their maintenance turnarounds. But she predicted that the premium for high-viscosity Group II stocks over low-viscosity Group IIs will continue to narrow. That trend, she said, is mainly the result of several refiners in the region – including SK and Formosa Petrochemical – increasing their output of heavy Group II.
The price difference between high- and low-viscosity Group II base oils in China is expected to gradually disappear, Shi said.