Demand for base oils and lubricants has improved in Asia, but COVID-19 infection spikes, growing unemployment rates and economic contraction in some countries are still hobbling a steady recovery.
One of the nations that appeared to have started on the road to recovery much earlier than others, following the start of the coronavirus pandemic, was China. A majority of businesses and factories had reopened once the outbreak appeared to be under control in March.
However, flare-ups in Beijing and surrounding areas have resulted in new restrictions, and this could impact the country’s economic well-being if the outbreak is not contained.
When the Chinese automotive industry had started to shut down factories earlier in the year, the lack of parts and components manufactured in those plants and exported to car factories all over the world had resulted in shutdowns at those plants as well.
If a second wave of shutdowns emerges in China, it could have a debilitating effect on automotive manufacturing everywhere else, as the segment was already facing some serious challenges, one of them being a sharp drop in sales.
For the time being, however, it appears that the Chinese industrial and automotive segments are able to keep the upswing that started in May.
According to the China Association of Automobile Manufacturers, automotive production in the country improved by four percent in May compared to April, reaching 2.187m units, while sales rose 4.4% year over year in April and 14.5% in May, S&P Global.com reported.
The coronavirus pandemic prompted a 42.4% year-over-year sales slump from January through March as dealerships were shuttered and the population remained under lockdown, the report showed.
However, as the economic impact of the COVID-19 outbreak dampens consumer sentiment, and subsidies and discounts begin to dry up in the second half of the year, experts believe demand will soften again, the S&P Global article said.
Another auto-related segment that utilizes large volumes of lubricants is the tire industry, and this sector has also been significantly hurt by the pandemic in Asia, market sources added.
As soon as countries such as India had started to ease on lockdown restrictions, most of the base oil and lubricants segments had begun to see a revival, but participants warned that the demand levels were significantly below those seen during the same months in years past.
Nevertheless, base oil suppliers reported a tightening of availabilities, given the reduced operating rates at refineries and base oil plants since earlier in the year, and the moderate uptick in requirements.
These conditions allowed for spot prices to stabilize, and some producers actually nominated increases for June and July transactions, which were supported by rising crude oil and feedstock values.
API Group I offers from Southeast Asian producers were heard to have been met with lukewarm buying interest, although this segment of the market appears to be fairly snug. Several of these cargoes were earmarked for China, with prices mentioned at around $500/ton CFR for the solvent neutral 500 and around $600-$625/ton for bright stock.
Offers for South Korean Group II supplies into India were heard to have edged up by $40 per metric ton for June shipments of light grades, and a similar hike was in the pipeline for July cargoes, but stronger resistance to these numbers was noted.
Certain factors such as the weather were expected to have a dampening effect on demand in India, as the monsoon season has started. However, these conditions have not yet had the anticipated impact on the market, and requirements were expected to gradually increase in the next few weeks if the business re-openings could be sustained, according to sources.
While availability of Group II material was considered plentiful in India, given the conclusion of transactions involving imports from the United States, the Middle East and South Korea, the start of a turnaround at the Taiwanese Group II facilities of Formosa Petrochemical Corp. in early July and later at a South Korean facility in August was expected to result in tighter spot supplies and steeper prices in the region.
Formosa’s Group II unit will be shut down from the beginning of July until early August. The producer typically ships large quantities of base oils to China and was expected to meet all of its contractual obligations. Formosa’s plant has a nameplate capacity of 600,000 metric tons per year of Group II base oils, according to Lubes’n’Greases Guide to Global Base Oil Refining.
The higher import prices from Northeast Asian suppliers were deterring Chinese buyers from securing additional cargoes. Offers for July shipments were heard to have been lifted by $50 to $60 per metric ton. Many end-users had already taken advantage of the relatively lower prices in May and have replenished inventories, and were therefore not in the market for additional spot cargoes.
The restart of several domestic base oil plants meant that local availability of products has also improved in China.
Asian spot prices were generally assessed as stable to firm, with ranges showing a moderate uptick on tightening supplies, higher offers, and firming crude oil and feedstock numbers. Group I prices were revised down, however, to bring them in line with current discussions.
Ex-tank Singapore assessments for the Group I solvent neutral 150 grade were steady at $490/t-$530/t this week, while the SN500 was at $530/t-$560/t. Bright stock was assessed at $630/t-$660/t, all ex-tank Singapore.
The Group II 150 neutral was unchanged at $500/t-$520/t and the 500N at $570/t-$610/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was heard at $420/t-$440/t, and the SN500 was adjusted down to $440/t-$480/t to show current discussions. Bright stock was also revised down to $520/t-560/t, FOB Asia.
Group II 150N was heard higher by $20/t at $440/t-$470/t FOB Asia, while the 500N and 600N cuts were assessed up by $50-60/t at $510/t-$550/t, FOB Asia.
In the Group III segment, the 4 centiStoke was notionally adjusted up by $10/t to reflect discussions at $680-$720/t and the 6cSt at $690/t-$730/t. The 8 cSt grade also edged up by $10/t to $670-690/t, FOB Asia for fully approved product.
Upstream, crude oil futures were range-bound on Thursday, propped up by a fall in U.S. unemployment and Wednesday’s report of a drop in crude inventories. However, the spike in U.S. coronavirus infections fueled concerns that economic activity might weaken in coming weeks.
Brent September futures were trading at $42.82 per barrel on the London-based ICE Futures Europe exchange on July 2, up from $41.63/bbl for August futures on June 25.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
Lubes’n’Greases shall not be liable for commercial decisions based on the contents of this report.
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