Asia’s base oil market experienced whiplash over the past year, as the impacts of COVID-19 pandemic shutdowns caused a cascading wave of effects on pricing, supply and refinery run rates that at times ran the gamut from record lows to rare heights, an industry analyst said.
“The year 2020 could be surmised as a topsy-turvy year for the base oils industry,” Matthew Chong, ICIS’ senior editor for Asia base oils, said during the ICIS World Base Oils & Lubricants Live event in mid-February. Chong noted that the rapid recovery in base oil prices caught most of the industry by surprise. “Group I and Group II prices in Asia have reached multi-year highs, with prices higher than even pre-pandemic levels in 2019,” he said. “No one would have expected that just a half year ago when prices were at rock bottom.”
Chong recalled how prices for API Group I solvent neutral 500 base oils actually surpassed that of Group II 500 neutral in October last year because of the tight supply of Group I. “Supply from the main Group I producing regions of Japan and Southeast Asia has been especially tight due to turnarounds at Japanese refiners’ units and reduced operating rates at … Southeast Asia refiners’ units since early 2020,” he explained. “Group I SN500 buyers switched to using Group II 500N instead because of the lower prices of Group II as the two grades that can be substituted for each other to a certain extent.”
This led to a rare Asia base oil market situation. “The only other time when Group I heavy grade prices were higher than that of Group II was in 2018 but it was only for a short period of time,” Chong noted. “This happened for a different reason [compared] to what is happening right now. At that time, there was tight supply of Group II cargoes from the U.S. because of hurricanes at the end of 2017, and also there were some plant shutdowns in Asia. Because of that, some buyers switched to Group I, which drove up its prices momentarily.”
Looking forward, he said supply of Group I in Asia is expected to remain tight until after the middle of this year, when Japan’s Eneos is scheduled to restart its “B” Group I base oil unit in Mizushima following a four-month turnaround that started in early February. That location has two Group I plants – one with 4,000 b/d and the other with 3,500 b/d Group I production capacity, according to the Lubes’n’Greases’ 2020 Guide to Global Base Oil Refining.
He noted that ExxonMobil has shut down its Singapore Group I base oil plant, which has 13,500 b/d of production capacity, since the end of May 2020. “There’s no clear indication on when it will restart,” he said. Another factor is IRPC’s scheduled shutdown from early March into mid-April of its 6,250 b/d Group I plant in Rayong, Thailand.
For Group II, Chong said, tight supply will likely begin to ease soon, as base oil shipments from the United States and Middle East are expected to gradually resume. “However, the turnaround at South Korean GS Caltex’s massive Group II unit in March will slow the speed of the supply recovery,” he added. That plant has 23,000 b/d of Group II production capacity.
Although acknowledging Group III prices have also trended upwards, in line with Group I and II prices, he explained that Group III price movements usually lag behind that of Group I and Group II. “Group III tight supply is expected to ease in [the second quarter] after the turnaround at SK Lubricants’ massive Group III unit in March,” and a turnaround the same month at GS Caltex’s smaller 3,000 b/d Group III plant in Yeosu are completed, he said. SK Lubricants’ Ulsan Group III plant has 26,000 b/d of production capacity.
Base oils refiners’ margins have increased significantly since June 2020, Chong noted, after most Asian countries came out of their lockdowns. The increase in base oil prices has been much more than that of crude and gas oil, he pointed out.
“You may be wondering if base oil margins are so good, why is the supply so tight?” he said. “The reason is because refiners are not able to produce as much base oils as they would’ve have liked because of reduced operating rates at their upstream, crude distillation unit, due to poor demand for jet fuel and other types of fuel due to the pandemic.”
He noted that before the pandemic, base oils were in an oversupply situation, especially for Group II, which is slowly replacing Group I production. “There were so many new Group II capacities and expansions in China in 2020 and 2019, and more are expected to start up in 2021,” Chong said. “However, some of these projects will likely be delayed or even canceled.” He concluded that overall Asia base oil demand is expected to recover from the third quarter onwards if the spread of the pandemic is brought under control quickly.