The virus is severe in China, she said. Many base oil refiners have cut operating rates to avoid inventory pressure as demand from lube companies has not resumed, and transportation on highways is still restricted.

With China effectively closed for business, Asias highly synchronized supply chain is being tested to breaking point, analysts say. They add that this will likely hit base oil demand hard in the first quarter, but fears persist that contagion from the outbreak could spillover into the second quarter, as uncertainty dampens consumer demand. Matthew Chong, ICIS senior editor, said some refiners are already looking to redeploy existing production.

I hear a Taiwanese refiner is looking for alternative outlets for its spot [API] Group II cargoes in March, as the bulk of its volume used to go to mainland China, and most of the downstream plants there are still shut, Chong said.

He added that South Korean refiners started cutting production late last year and have limited spot availability. But South Koreas problems are compounded by an outbreak of the virus that has spawned the largest number of confirmed infections after China. According to London-based research consultancy Capital Economics, major auto manufacturers – including South Koreas Hyundai and Kia – have been forced to temporarily halt production of some models due to a shortage of parts from China, but fears are growing that the recent outbreak could further hit South Korean exports, which fell sharply in January, and erode already weak domestic demand.

Meanwhile, ExxonMobils newly expanded refinery in Singapore – which produces Group II base stocks mainly for the Asia-Pacific market – has not suffered any disruption, Chong adds. At the time of writing, ExxonMobil Singapores media office could not be reached for comment. With the outbreak continuing to unfold, already fragile base oil prices are set to come under renewed pressure as commodity markets grapple with the crisis.

China emerged as a key battleground for refiners from South Korea and Singapore as they fend off new Group II and III base stocks from plants in the Middle East. Base oil refiners from Bahrain, Saudi Arabia and the United Arab Emirates have been particularly aggressive in a bid to gain share in China, the worlds largest lubricant market. Despite sanctions, Iran is a longstanding supplier of Group I base oils to China, but recent reports of an outbreak of the coronavirus in Iran, together with weakened heath care infrastructure, could propel authorities to shut down major cities.

Consultancy Wood Mackenzie estimates the coronavirus will shave 250,000 barrels a day from Chinas crude imports in the first quarter. They believe weak downstream demand will also have a major impact on the polyolefins industry, with expectations the coronavirus will be more severe than the 2003 outbreak of severe acute respiratory syndrome, known as SARS. Growing market uncertainty could also put a brake on base oil or lubricant plant expansion plans, leading to supply bottlenecks when a recovery is underway.

Sources say shipments were stuck for the last three weeks at Shanghai port, one of the countrys busiest, with port authorities hinting the situation will continue for at least another two weeks. Shailendra Gokhale, managing partner at Rosefield DAA International Consultancy in Mumbai, said although some modest signs of activity have taken place, full recovery remains some way off. Chinese factories have started working now, but output is far lower – so this is bound to impact inward and outward movement of base oils and additives for the near future.

Global financial markets experienced sharp sell-offs this week as fears grew over the spread of the virus. With global lubricant demand already leveling off, the outbreak comes at an inauspicious time for base oil markets. Amid reports of the outbreak spreading to Europe, the odds against the coronavirus being a localized event just got a lot shorter.