Base oil refiners in the Middle East face a slowdown in business from China, following the outbreak of the deadly coronavirus as the crisis shreds lubricant and grease demand in key sectors.
Analysts say Chinas economy is expected to undergo a sharp correction in the first quarter, denting factory output amid weakening consumer sentiment.
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According to Matthew Chong, senior editor at ICIS, most blending plants on mainland China remain shuttered as fears grow that the crisis in the worlds largest automotive market may not yet be fully contained.
China emerged as a key battleground for base oil refiners from South Korea and Singapore as they struggle to fend off new API Group II and Group III base stocks from the Middle East. Base oil refiners from Bahrain, Saudi Arabia and the United Arab Emirates have been particularly aggressive in a bid to gain share in the all-important Chinese market. According to Mumbai-based Petrosil, the U.A.E. base oil exports to China during the first 11 months of 2019 jumped 30 percent from the same period of 2018, reaching 80,000 metric tons.
The extent of the impact on Chinas base oil imports is difficult to gauge, but consultancy Wood Mackenzie estimates the crisis will lop 250,000 barrels per day from Chinas crude oil imports in the first quarter. The consultancy states that weak downstream demand could also have a major impact on the polyolefins industry.
A spokesperson for Abu Dhabis Adnoc said its base oil business had not been affected so far. By deadline, a spokesperson for Shell which produces Group III and III+ base oils at Qatar Petroleum and Shells Pearl gas-to-liquids plant in Ras Laffan, Qatar, did not respond to a question on how the outbreak affects exports.
Analysts say Middle East refiners have made considerable efforts to strengthen their relationship with China because the downstream market, which includes base oils, has become integral to the regions refining strategy. Yet the outbreak comes at a critical time for Middle East refiners, with GP Global Group estimating the region will have a supply glut of 3 million tons per year. Recent reports say Group III base oil prices from the Middle East Gulf firmed towards the end of last year, but they are set to come under renewed pressure as demand from China wanes.
The short term outlook for lubricant and grease demand in Chinas automotive, aviation and industrial sectors looks increasingly precarious, casting a shadow over demand for Group II and III base oils. The crisis is also likely to put a spotlight on base stocks that hold original equipment manufacturer technical approvals and their non-approved counterparts. Prices for approved Group III stocks often bring pricing premiums, currently around U.S. $100 per ton over Group III oils with partial slates of approvals.
Geopolitical tensions have also cast a shadow over the durability of regional supplies, as Iran and Washington came very close to direct conflict last month, triggering a spike in insurance premiums. Higher freight charges increase the delivered cost of Chinas base oil imports from the Middle East.
Still, the Middle East may yet mirror the trend already adopted by refiners in Asia. They have moved quickly to cut production to stem a rapid build-up of inventory as they grapple with an increasingly unpredictable outcome to events, ICIS says. But any additional restrictions by Chinese authorities on the transportation sector might curb lubricant demand and further delay the resumption of production at domestic blending plants.
With Middle East lubricant demand forecast to shrink 1.3 percent this year, according to a Dubai-based trading company, Chinas outbreak adds another unknown at a time when markets are already struggling with the dual pressures of geopolitical risk and overcapacity.