The coronavirus (or Covid-19 as it is officially known) continued to take center stage in discussions about the market situation, given that the virus outbreak is not only affecting China, where it originated, but is also causing upheaval in many other countries as well, as the number of infections appeared to be multiplying.
Due to quarantine and travel restrictions in China, many manufacturing facilities have closed temporarily, or are running with reduced personnel, causing disruptions to the supply chain.
This is affecting base oil and lubricant demand from key sectors such as the automotive industry in China, as well as in other nations such as South Korea, where Hyundai has suspended operations at seven factories as they rely on parts and components from China.
Furthermore, with public transportation restrictions in place, and travel in general seeing a sharp decline, demand for lubricants has also suffered a significant drop from that segment.
Base oil plants in China were heard to have either idled operations, or are being run at reduced rates due to the slump in demand and the lack of employees in some areas. Among the plants that have been reported off line are Hainan Handi‘s API Group II plant in Hainan, Sinopec‘s Group I and II plant in Gaoqiao, Shanghai, and Panjin Northern Asphalt’s Group II and naphthenics unit in Panjin.
Additionally, Sinopec’s Group I/II and III plant in Maoming, Kaitai Petrochemical‘s Group II plant in Zibo, and Shandong Hengrunde’s Group II unit in Shandong were heard to have slashed operating rates.
Import volumes to China have also seen a significant reduction. Regular suppliers to China such as Taiwanese, South Korean and Middle East producers have not only seen a demand reduction in their own domestic markets, but have been forced to look for alternative takers for products originally earmarked for China. This situation was heard to be causing concern among producers in other regions as cargoes were being offered at competitive levels.
Indeed, United States producer Motiva communicated a posted price decrease for North America, prompted by a decline in crude oil numbers and the need to remain competitive against offers for deep-sea material, according to sources.
It was heard that a 10,000 metric ton parcel of Group II grades of Asian origin had already been offered to U.S. receivers at an attractive price, and similar cargoes were expected to appear on the scene in the next few weeks.
Some Northeast Asian and Middle East base oil parcels have been sold to India, but Indian demand could also be affected by the spread of the coronavirus and its repercussions on industrial activity, and the country was heard to be saturated with product for the time being.
With the prospects of finding alternative homes for their products becoming more challenging, Northeast Asian producers were heard to be cutting back operating rates in order to avoid bulging inventories.
A majority of South Korean producers had already dialed back production in the last quarter of 2019 due to oversupply conditions, and spot availability was therefore thought to be limited. Sources speculated that running rates were currently much lower than suppliers were willing to admit.
There were reports that Hyundai Oilbank-Shell had trimmed operating rates at its Group II plant in Daesan by an additional 10 percent from already reduced rates this week, with the company said to be running at or slightly below 80 percent, but this could not be confirmed with the producer directly.
S-Oil was running its Group II/III plant in Onsan at normal rates, despite a decline in domestic and Chinese demand, and the producer was striving to increase its export volumes to other regions to make up for the softer conditions, a source familiar with the company’s operations said.
SK Lubricants was heard to be also running its Group III plant in Ulsan at normal rates, although sources said that even if one of the production lines were completely shut down, it would not make a big dent in supply as SK’s facilities produce a huge amount of base oils. There were also reports that the company’s Group II facilities had been idle since the third quarter of last year, but this could not be confirmed.
There was no update forthcoming about GS-Caltex’s Group II/III operations in Yeosu, but the producer was heard to have cut operating rates back in late 2019 and was likely to continue doing so in the short term.
In the current business environment, base oil spot prices were largely influenced by supply/demand conditions, rather than other factors such as raw material prices, although these added to the bearish sentiment, sources commented.
While some discussions for March business were ongoing, sentiment was cautious as buyers hesitated to commit to purchases given that demand from downstream segments could change from one day to the next.
Prices were generally static due to the lack of active trading, but values continued to be exposed to downward pressure.
Ex-tank Singapore Group I prices for the solvent neutral 150 grade was assessed at $660/t-$680/t, and the SN500 was at $710/t-$730/t. Bright stock was unchanged at $820/t-$840/t, all ex-tank Singapore.
The Group II 150 neutral and 500N were holding at $720/t-$740/t and $730/t-$750/t, respectively, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was assessed at $530/t-$560/t, and the SN500 grade was steady at $540/t-$550/t. Bright stock was hovering at $690/t-$710/t, FOB Asia.
Group II 150N was heard at $560/t-$580/t FOB Asia, while the 500N and 600N cuts were holding at $580/t-$600/t, FOB Asia.
In the Group III segment, the 4 centiStoke and 6 cSt were heard at $760-$790/t and $770/t-$805/t, respectively. The 8 cSt grade was unchanged at $710-730/t, FOB Asia for fully approved product.
Upstream, crude oil futures fell for a fifth day on Thursday to their lowest since January 2019 as a growing number of new coronavirus cases outside of China fuelled fears of a pandemic which could slow the global economy and lower crude demand, CNBC.com reported.
Brent crude was down 2.8 percent, while West Texas Intermediate futures fell 2.7 percent. In the five trading sessions through Thursday, Brent has dropped 10.6 percent, while WTI has declined 10.4 percent, their biggest five-day percentage losses since August 2019.
On Thursday, Feb. 27, Brent April futures were trading at $51.88 per barrel on the London-based ICE Futures Europe exchange, compared to $58.97/bbl on Feb. 20.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
LubesnGreasesshall not be liable for commercial decisions based on the contents of this report.
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