China Trending Toward Group II

API Group II is becoming the dominant grade in Chinas base stock market, a trend that should continue with further capacity additions in coming years, an analyst with ICIS China-C1 Energy told an industry conference in London Thursday.

Whitney Shi also predicted that China will become a significant exporter of base stocks following recent regulatory changes that encourage overseas sales of base oils, lubricants and greases.

We believe that in the next five years the Group II share will increase sharply, Shi said at the ICIS World Base Oils & Lubricants Conference. This article is based on an audio recording of Shis presentation made by a LubesnGreases reporter attending the event.

Chinas base oil capacity has grown steadily in recent years due to new plant openings and expansions of existing facilities. As Shi noted, most of the new capacity has been for Group II oils. At the same time, refiners have closed some Group I capacity. As a result, the nations base oil capacity had swelled to more than 7 million metric tons per year by 2015, and Group II accounted for 49 percent of that total, compared to just 38 percent for Group I.

It appears that Group IIs share of the supply base will increase in coming years, since additional expansions, new plant construction projects and upgrades have been announced but not yet completed. State-owned oil giant PetroChina has said it will upgrade all five of its plants. Several independent refiners have also announced projects.

As Shi observed, a number of announced projects have been delayed - some more than once - and with the global market mired in a glut, analysts have suggested that some may not come to fruition. Still, Shi predicted that enough projects will be completed to make Chinas market more lopsided toward Group II.

Until now, nearly all of the base oil produced in China has been consumed domestically. The country had a large supply gap, and exporting was complicated by regulations requiring suppliers to conduct sales through one of three companies designated by the government, two of which were subsidiaries of Sinopec and PetroChina.

But Chinas demand-supply gap for base oils and other petroleum products has shrunk or disappeared, and the government recently relaxed regulations for the export of base oils, lubricants and greases in an effort to take pressure off the domestic market.

ICIS expects base oil sellers will move quickly to take advantage of the rule changes.

We believe in the near future the export volume of base oils will increase, Shi said.

Shi also predicted that China will again raise the rate on a consumption tax that applies to base oils and other types of goods. Lower oil prices gives the government cover to increase the levy, which it did several times during 2015, but a higher tax creates challenges for base oil traders, she said.