Chinas base oil capacity has expanded significantly in recent years, but at least some refiners are now producing well below capacity. In the short term, that may be due partly to reduced demand during the slack season for lubricant demand, but the market also appears to be fundamentally oversupplied.
In 2016, total base oil capacity in China was around 8.2 million tons, Gong Wei, of commodity pricing information platform sci99.com, said in an interview. Domestic demand, however, was less than 6 million tons, and over 2.7 to 3 million tons of this demand was met by imports from overseas.
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Shandong Fangyu Lubricating Oil Co. is among the refiners making base oil at rates lower than their capability. A subsidiary of Zibo, Shandong province-based Qingyuan Group, a private conglomerate with business in plastics, logistics and lubricants, Fangyu owns a plant located in Zibo with nameplate capacity to make 600,000 tons per year of Group II and Group III stocks.
The facility began operating during the second half of 2015 but spent the next year running trials and adjusting operations. It began making Group III oils in June 2016, but stopped after finding them neither well-received nor profitable, officials told Lube Report Asia recently.
Now the plant makes only Group II stocks. Shangdong Fangyu was reluctant to disclose current production rates, but Zhang Chenhui, an independent industry consultant familiar with Qingyuan, said it is producing 20,000 to 30,000 tons per month.
Shandong Fangyu is not the only Chinese base oil supplier to have backed away from Group III. In recent years, several plants underwent upgrades giving them technical capacity to make Group III, in attempts to take advantage of rising demand.
However, most Chinese base oil suppliers still lag behind in techniques, which often results in low output of Group III base oils of inferior quality, Zhang said.
As a result, compared with similar products from foreign companies, clients are not interested in domestically produced Group III. This reduces prices so much to make these products unprofitable.
Now many of the base oil suppliers upgrade their facility to Group III-capability only to get prepared for the future and to improve brand image, Gong said.
Gong said refiners are also reducing overall base oil output by shifting production from base oils to gasoline and diesel, which is currently more profitable.