China Wants Higher VI

Chinese refiners have built a lot of capacity to produce API Group II base stocks, but the viscosity indices of the oils from those plants are largely lower than blenders want. This is a major reason that the country imports large volumes of base stocks, according to speakers at an industry summit in Xiamen last month, who added that the situation is unlikely to change in the next few years.

Through upgrades and new construction, Chinese refiners have added large amounts of Group II capacity in recent years - to the point that Group II now accounts for just over half (4.3 million metric tons per year) of the countrys 8.5 million t/y of base oil capacity. But the viscosity indices of those oils are largely less than those demanded in China, especially as the market trends toward higher-quality finished products. Group II base stocks by definition contain at least 90 percent saturates, no more than 0.3 percent of sulfur content, and have viscosity index of between 80 and 120.

According to a spokesman from Sinopec, the price of low VI Group II oils will remain weak in the following years because of the abundant supply from recent and upcoming capacity additions.

Within the Group II spectrum, oils with higher viscosity indices are the most-demanded cuts nationwide. Yet theres a shortage of those oils in the country. The oversupply of low VI Group II base oils result in growing demand for imported high VI Group II and III base oils, Zhou Gantang, head of Sinopec Beijing Research Institute, told the conference.

According to Chinas customs data, the country imported over 2.8 million tons of base oils in 2016, up 10.5 percent annually - with South Korea, Singapore and the United Arab Emirates the top three sources. Imported base oils now account for more than 40 percent of Chinas total base oil market, compared with 22 percent in 2007.

Zhou contended that Chinas slow adoption of Western lube standards is to be blamed for the oversupply of low VI Group II oils. For example, despite increasingly strict environmental policies, there is still demand in some remote areas for API SF and API SE motor oils, which the American Petroleum Institute long ago declared obsolete in the United States. SF and SE were not recommended for engines built after 1988 and 1979, respectively. In the United States, for example, its difficult for consumers to even find products claiming to meet anything other than the current SM, SN, SJ and GF-5 categories.

Similarly, China still has a market for diesel oils with standards introduced 60 years ago, Zhou continued. With such slow adoption of high-quality lubes in China, its no wonder low VI Group II oils are oversupplied.

As for the demand for high VI base oils, Zhou said Chinese consumers are buying more cars with automatic transmissions, which use automatic gearboxes that require heavier transmission oils.

Another factor influencing demand in finished lube formulations is Chinas 2015 two-child policy, which has Chinese families replacing sedans with bigger SUVs. Expensive SUVs require higher-quality lubes, which is driving the growing demand for Group III base oils, said Kong Jingyuan, a director at PetroChina Planning & Engineering Institute.

China sold 4.5 million SUVs in the first half of 2017, up nearly 17 percent over the previous year, according to China Association of Automobile Manufacturers.

Owning a car is not enough. Chinese consumers are after high-quality cars. This will drive the growth of lube consumption, which benefits the sales of high VI Group II and Group III base oils, Kong said.

In urban areas, where environmental laws are better enforced, logistics companies have to replace existing heavy-duty trucks with newer models that meet Chinas IV standards, imposed in 2015. The policy helped push the number of trucks sold from January to August this year to 765,000, a surge of 74 percent over the same period last year, according to CAAM.

New emission standards will push the sales of new vehicles, which eventually benefit the whole lube sector, said Kong. Stricter emission standards and environmental laws will also offer opportunities for synthetic and coal-to-liquids base oils, he said.

For example, Luan Tiahang Lubricating Oil, a subsidiary of the state-owned coal mining company Shanxi Luan Mining Industry Group, is running bench tests with its additives supplier Chevron Oronite. Taihang expects to begin the mass production of its first batch of CTL-derived synthetic lubricants in March 2018.

China aims to produce 13 million t/y of CTL oil products by the end of 2020, according to the countrys 13th five-year plan. Currently, capacity for such products is around 8.8 million tons a year, including about 10,000 tons of base oils, according to China National Petroleum & Chemical Planning Institute.

Although CTL base stocks are said to have HVI and contain much less sulphur and nitrogen, their performance in lube formulations is yet to be proven. Lots of tests need to be run, such as those to show how existing additives work with coal-based oils, said NPCPI consultant Wang Yubo. CTL lubes might be highly competitive among high-quality lubes, but we wont know until we see the tests, he added.