With few signs that China’s economy will bounce back in the second half of 2022, Chinese oil suppliers need to brace themselves for weak demand, industry experts said at a recent conference.
China’s apparent lube consumption in 2021 dropped 3.6% year over year to below 8 million metric tons and will continue to go south in 2022, due to the weak economy induced largely by China’s draconian zero-COVID policy, ICIS analyst Whitney Shi said at the Enmore Lubricants Conference held in Suzhou on July 21. Apparent lube consumption is production plus imports minus exports.
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“We don’t see that demand for motor lubes and industrial lubes will tick up in the second half of 2022,” Shi said.
The persistent COVID-19 pandemic and China’s zero-COVID approach, which led to rounds of lockdowns in such major cities as Shanghai and Shenzhen in the first half of this year, has taken a toll on its economy. Shanghai’s gross domestic product shrank 5.7% year over year, according to China’s statistics office.
Weak demand for lubes also affected the base oil business. ICIS reports base oil apparent demand decreased 2.5% year-on-year to about 6.7 million tons in 2021.
China also imported less base oil in 2021, down 15.5% from 2.1 million tons in 2020, according to ICIS. The number will continue to drop this year, Shi said. However, China’s slow economy is just one of the reasons.
“There are multiple reasons for China to buy less base oil from abroad,” she said. “One reason is sufficient domestic supply of API Group II base oils.”
In 2021, China churned out 4.7 million tons of base oil, mostly Group II oils, up 6.8% from 2020, when the output plummeted 8.3% from 2019. In the third quarter this year, Hebei Feitian, a refiner in Shijiazhuang, Hebei province, is expected to begin operations at its new 250,000-ton-per-year facility.
“Group II oil imports will continue to drop in 2022, probably to their lowest level in the recent decade,” Shi said.
Another reason for a decrease in imports was short supply, she said. Since early 2021, when most Western countries started to ease restrictions and live with the virus, European and American clients were willing to pay extra to buy base oils from Asia to meet their growing demand due to the fast economic recovery.
“Seeing China’s weak demand, Asian buyers preferred Western clients,” Shi said.
The battered economy pushed many industrial oil and engine oil suppliers to seek opportunities in metalworking fluids, making the sector more crowded and fractured than before, said Zhang Chenhui, deputy director at the China Petroleum and Chemical Industry Federation, a state-backed industry organization in Beijing. He said a big problem in the sector is that a vast number of small blenders supply cheap, low-quality fluids, typically to equally small clients mainly in Zhejiang province making low-quality auto parts. In extreme cases, some suppliers use young female models to promote “synthetic fluids” blended with liquid soap and inorganic salts on the popular app Douyin, which is TikTok’s twin app in China.
“The availability of these low-quality products has a negative impact on the pricing power for companies producing high-quality fluids,” Zhang said. “That’s why the price of real synthetic fluids did not change much, and even dropped a little in the first half of the year despite the rising costs.”
Even as small suppliers were forced to shut down by local law enforcement in such areas as Guangdong province in recent years, the demand for metalworking fluids is not likely to rise, he added.
“Good-quality fluids tend to have a long life, and it will delay the demand,” he said, adding that on average the oil change interval will be over five years instead of the current three or four years. Zhang also predicted that China’s annual demand for metalworking fluids will stay around 400,000 tons for a very long time.
Still, he offered a silver lining. As China continues to push manufacturing in high-tech areas, there will be growing demand for high quality metalworking fluids, especially those used for new materials like aluminum-magnesium alloy, aircraft-grade aluminum and photoelectric materials. Zhang suggested that companies invest in research and development to stay competitive in the market.
Investments should also be made in improving service because the sales of the fluids heavily rely on professional services, Zhang said, offering Zhuhai-based Shunyi Development as an example. The company started as a fluid supplier two decades ago but in recent years has established service as its core business, sending engineers to work full time at clients’ facilities to tackle on-site issues.
“Service is the future for the metalworking fluid business,” Zhang said.