China Faces Group II Glut

CHENGDU, China - The Asia-Pacific regions API Group II base oil production capacity increased to make up 45 percent of the regional market in 2015, largely driven by new Group II capacity in an already awash China, according to ICIS.

New base oil capacity added in China this year propelled that country from a 31 percent share of the Asian market to 33 percent - making it the regions largest. South Korea held on to the number two spot with 28 percent, while Singapores 1 percent increase in share has it producing 12 percent of the regions base oils. Japan follows at 10 percent, while the remaining Southeast Asian countries and Uzbekistan and India each have up to 5 percent of the market.

ICIS China's Whitney Shi presented this data to the Enmore (formerly known as CBI) 2015 Base Oil Summit held here Sept. 23 to 25.

The Group II category now accounts for 45 percent of the regions capacity, overshadowing Group I, which now is at 38 percent. Despite Korea having two of the three largest Group III refineries in the world, that grades share of the regional market shrank to 17 percent.

The surplus developed despite a significant number of maintenance shutdowns in the region this year - including several in Japan and South Korea. Maintenance work was particularly heavy in China, which had at least 17 partial or full shutdowns this year, including temporary closings of three refineries this month. Chinas year-to-date tally includes 11 plants.

Four of PetroChinas Group I refineries underwent or will undergo upgrades by 2019 to allow for Group II production, and are all temporarily suspended as a result.

CNOOC will complete its 400,000 t/y Group II Taizhou Petrochemical plant by the end of this year. Sinopec will finish adding 250,000 t/y of Group II capacity to its 400,000 t/y Group I Maoming Petrochemical plant by the end of this year, and has permanently shut its Yanshan Group I facility to add 240,000 t/y of Group II capacity in its place.

Chinese independent base oil suppliers are also adding Group II capacity. Nanjing Refining Co. is adding 200,000 t/y of Group II in the fourth quarter, and Hainan Handi Sunshine is building a Group II/III plant - its second on Hainan - which is scheduled to stream in 2017.

Chinas increasing capacity flies in the face of the regions overall base oil demand, which has shown slowing growth year over year to settle at around 14 million tons in 2015. This is driven in a large part by the sputtering of Chinas economy - which slows growth for both industrial lubricants and passenger car motor oil because factories cut back production and car ownership growth rates relax.

Chinas base oil imports have already gradually decreased due in part to the governments devaluation of the yuan, which made foreign products more expensive. In 2015, ICIS predicts that base oil imports to China will decline to 2.6 million tons - down markedly from last year.

Forty percent of Chinas base oil imports are from South Korea, and ICIS forecasts that Chinese demand for these products will remain steady. Singapore exports account for 24 percent of Chinas foreign base oil consumption. The amount that China gets from Taiwan dipped this year to 13 percent, due to the shutdown of the CPC-Shell Group I plant there and a lengthy turnaround by Formosa Petrochemical.

Of individual Group II grades, 150N was perhaps the least profitable throughout Asia in 2015, as prices sunk to less than U.S. $600 per ton for a majority of the year due to excess supply. Chinas prices for these light oils dropped even more dramatically from January to August due to lower demand. Shi noted that the Chinese markets price decline was greater than the range of price drops in Asia overall.

Prices for high-viscosity grades in both Group I and Group II camps have actually been mostly on the rise due to tight supply. SN500 has been one of the more profitable cuts due to maintenance turnarounds and other supply shortages - from January to July, the price for SN500 was up to 800 (U.S. $126) per ton. Still, supply saturated the market by Sept. 18, and the cut was at a record low price of around 700/t.