Group II, III Demand Rise in China

SINGAPORE - Growth in China's overall consumption of lubricants and base oils slowed due to a downturn in the countrys industrial sectors, but API Group II and III markets are strengthening, according to an analyst at a conference here last week.

Demand in Chinas lubricants market in fell in 2015, the only year during the past decade for that to happen, said Feedco S.A. analyst Kim Lu in a presentation at the 10th ICIS Asian Base Oils & Lubricants Conference. The market constricted 2.4 percent to 8.8 million metric tons, after rising approximately 6 million tons in 2006.

According to the National Bureau of Statistics of China, the countrys GDP growth was 6.9 percent in 2015. Economic growth has slowed each year since 2007, when its growth rate was 14.2 percent.

But the decrease in lube demand stems primarily from a slump in the countrys industrial sector, said Lu. The main reason for the minus growth was due to the slowdown in the steel and real estate [construction] industry.

Base oil consumption in the country was affected as well, resulting in a downturn of minus 8.1 percent in 2015 year over year to 7.5 million tons. However, Group III base oil was a bright spot, recording positive growth in 2015. Lu forecasted an increasing trend in China for blenders to upgrade base oils from Group I to Group II and Group III with the implementation of more stringent emissions and fuel economy standards, and the increased usage of higher-quality lubricants.

Lu sees potential for more growth in China as car ownership levels are still very low. In 2015, there were 170 million passenger cars servicing a population of 1.36 billion compared to the United States, which has 370 million cars in a population of 320 million.

Chinas base oil refineries had capacity to produce about 7 million tons in 2015, she said, not including Group III oils, which are not produced in the country.

Chinas base oil production is currently dominated by Group II at 51 percent and Group I at 49 percent. China is a net importer of Group III base oils. The countrys base oil consumption mainly consists of Group II at 35 percent, followed by Group I at 28 percent and Group III at 6 percent. Naphthenic and off-spec base oils contribute 11 percent and 20 percent, respectively.

There is also a trend in China for refiners to build or upgrade Group II plants, Lu pointed out. This includes Sinopec Maomings new 250,000 metric tons per year plant, scheduled to open in the first half of 2016; China Gas & Power Group (Taizhou)s new 400,000 t/y plant slated to commence in June; expansion of Hainan Handi Sunshine Petrochemicals plant, which will give the company a Group II capacity of 1 million t/y when operational in 2017; and Dalian Hengli Petrochemicals new plant, which will have Group II capacity of 683,000 t/y when it starts up at the end of 2018.

Some companies, such as PetroChina, will be upgrading Group I plants to produce Group II as well, but the completion dates of the projects are still pending, Lu said.

Chinas market for Group III oils in 2015 grew 6.8 percent, reaching 461,000 tons. According to NBS and China customs data, the largest volume of Group III base oil imports came from SK Lubricants, at close to 200,000 tons, and was followed by S-Oil, Shell GTL, Neste Oil, Petronas and GS Caltex.

Chinas Group III market players are [fewer] than Group I, Group II and others, which means well-controlled sales channels and better margins for distributors, said Lu.

In the future, we assume Group III will have an upward trend, she added, noting that better-quality lubes will be needed, with stricter emission levels and fuel economy regulations.

She explained that Chinas demand for Group III comes mainly from the production of lighter-viscosity automotive lubricant grades such as 10W-40, with only a small portion of demand coming from industrial lubricants, which she said are mainly formulated from Group I, Group II and off-spec base oils.

Group III base oils market share can be broken down to 4 centiStoke, with 57 percent; 6 cSt with 22 percent; and 8 cSt, with 21 percent, according to Chinas NBS and customs department.

East China is the largest [market] for Group III base oils and a majority, or 68 percent, of the demand is for 4 cSt, Lu said. This is the hub of mid- and large-scaled lubricant plants located in Jiangyin, Taicang, Wuxi and others and major discharge ports in Nantong, Jiangyin and Taicang.

Northern China, where there is a large manufacturing hub, represents the second-largest region for Group III consumption, with demand for 6 cSt and 4 cSt at 49 percent and 45 percent, respectively, she added. Southern Chinas consumption is dominated by a 77-percent share of 4 cSt base oils.

Based in Geneva, Switzerland, Feedco is an independent and privately owned oil trading company.