Base oil buying interest in Asia continues to be weak, given ample supply and the possibility that prices may slide in coming weeks. Several Asian producers have decreased their list and spot prices in order to promote sales, but the strategy has met with limited success.
Buyers are waiting for prices to drop further, and are not willing to buy until that happens. Why would anyone buy product today if they think they can buy it cheaper tomorrow? a supplier lamented, citing volatile feedstock and crude oil prices, and plentiful base oil supplies as the main reasons for the recent price reductions. The supplier added that about 30 percent of the rationale behind the price markdowns could be attributed to the fall in crude oil prices, and 70 percent to the current market conditions.
Crude oil prices have fallen to four-year lows on an increase in production and the release of disappointing data about the Chinese economy. Brent futures were hovering in the high $70s per barrel this week, compared to prices at around $110/bbl in July.
Another factor impacting purchases has been the weakening of local currencies against the dollar, which has reduced buyers purchasing power for imports.
The global base oil supply and demand balance has also been tipped towards an oversupply position due to the introduction of additional capacity from the 650,000 tons per year Group II Hyundai Oilbank-Shell unit in Daesan, South Korea, the 1.25 million t/y Group II Chevron plant in Pascagoula, Mississippi, United States, and the 650,000 t/y Group II/III Repsol-SK plant in Cartagena, Spain this year.
The short-term effect of so much product coming to the global market at once is that prices have plummeted and sentiment is very bearish.
In the longer term, the explosive growth in capacity will disrupt existing producers, explained Blake Eskew, IHS Vicepresident of Downstream and Industry Analysis and Consulting at a presentation during the AFPM Conference in Houston, Texas, on Nov. 13.
Like many other industry analysts, Eskew underscored the likelihood of some Group I plants having to close down because global base oil capacity is growing much faster than demand, especially in the Group II and III categories.
As government and industry regulations require the use of higher quality base oils, Group II and III demand will expand, but Group I requirements will continue to shrink, which will lead to plant rationalizations.
Based on announced base oil plant closures, Group I will represent roughly 40 percent of global capacity by 2020, down from 75 percent in 2005, Eskew said.
The Group I plant profile differs widely across the globe, with a majority of facilities in Asia considered to be small to medium size. Even if all the small plants were rationalized or shut down, it would be insufficient to rebalance the global market, so the closure of units that are a good size is very likely too.
Group I producers will have to underscore the manufacture of specialty products, including bright stock, waxes, extracts, and asphalts, in order to survive, Eskew concluded.
In Taiwan, the 250,000 t/y CPC-Shell Group I plant in Kaohsiung is slated to be closed down permanently before the end of the year, ahead of the decommissioning of the Kaohsiung refinery. CPC-Shells 120,000-t/y Group I low-vis production line, which manufactures SN150, was shut down in June 2013 for a routine turnaround of the companys base oil production facilities and has not been restarted due to economic reasons.
On the pricing front, domestic prices in China have fallen again, placing them at their lowest in several years, sources said. Local producers, as well as regional suppliers who export to China, have decreased prices in order to attract business as demand has slowed down significantly compared to the previous months.
Last week, Formosa reduced its November Group II spot offers into China by $80-85/ton for its neutral 150 grade, and $90-100/ton for its N500, compared to October values.
Asian prices in general were assessed as unchanged this week, following revisions the previous week, and continue to be exposed to downward pressure.
On an ex-tank Singapore basis, Group I solvent neutral 150 prices were assessed at $1,030-$1,070/t, and SN500 at $1,020-$1,080/t. Bright stock was heard at $1,180-$1,225/t.
On an FOB Asia basis, Group I SN150 was gauged at $830-$860/t FOB, while SN500 was heard at $840-$880/t FOB. Bright stock prices were holding at $1,125-$1,145/t FOB.
Within the Group II segment, prices for 150N and 500N were unchanged at $840-$860/t FOB Asia and $860-$890/t FOB Asia respectively.
In the Group III segment, prices of 4 centiStoke and 6 cSt oils were assessed at $980-$1,020/t FOB Asia, and the 8 cSt grade at $960-$990/t FOB Asia.
On the shipping front, several base oil parcels were expected to be shipped from South Korea in the next few weeks. A 1,500-ton lot of two base oil grades was being discussed from Yeosu to Dongguan, China, for Nov. 25-29 shipment. A 1,000-ton parcel was on the table from Yeosu to Tianjin for Nov. 11-18 lifting. A 3,000-ton cargo was being quoted from Daesan to Merak, Indonesia, for prompt lifting. A 2,000-ton lot was being worked on from Daesan to Godau, China, for Dec. 24-30 shipment. A 1,600-ton cargo of two grades was likely to be shipped from Onsan to Tsurumi and Wakayama, Japan, on Dec. 1-4.
In Taiwan, a 3,000-ton cargo was discussed from Mailiao to Merak for prompt shipment.
A 2,000-ton lot was expected to be shipped from Sriracha, Indonesia, to Merak in December, and a second 2,000-ton cargo was likely to move from Sriracha to Singapore at the end of November.
A 3,000-5,000-ton cargo was quoted for Singapore to Merak for Nov. 21-26 lifting, while a 3,000-ton lot was on the table from Savona, Italy, to Singapore for prompt lifting. A 1,750-ton cargo of bright stock was likely to be shipped from Sriracha to Ulsan, South Korea, on Dec. 1-15.
Upstream, December ICE Brent Singapore futures were trading at $78.08 per barrel in afternoon trading on Nov. 17, compared to $83.61 per barrel on Nov. 10.