Chinese base oil and lubricants plants have closed, and trade flows are being constricted by the rapidly spreading coronavrius epidemic.
As of Monday, 2,628 people have died with another 79,719 infected by the virus, officially designated Covid-19, which originated in the Chinese city of Wuhan. Cases of Covid-19 have reached Southeast Asia, the Middle East, Western Europe, Scandinavia and North America.
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Asian base oil markets have been hit hardest by disruptions from the epidemic, which have limited trading in the Middle East, while entities in Europe and the United States have largely been unaffected, according to Vicky Ellis, senior editor manager for commodity intelligence provider ICIS.
Measures taken to contain the disease have battered Chinas economy, stalling industrial activity and halting exports of countless items. The damage to the economy was estimated by Zhu Min, the former deputy managing director of theIMF, at U.S. $196 billion in lost revenue. In an effort to prevent contagion, a wide variety of businesses delayed for weeks the resumption operations that normally follows new year celebrations. In the epicenter of the outbreak, schedules for reopening have now been pushed back until March 11.
Chinas imports of many raw material have dropped, Denis Varaksin, director of base oils and waxes at German trading company DYM Resources GmbH, told Lube Report. So, the import of base oils has decreased massively, and a big part of that import was Group III … from South Korea, Malaysia and the Middle East.
There is a growing glut of API Group III base stock that was destined for China, and it is likely that prices will fall as producers look to offload cargoes elsewhere.
Korean producers in particular have been hit by the lack of Chinese demand, according to our contacts, with Group II and Group III material that was bound for China now expected to be sent elsewhere, ICIS Markets Editor Samantha Wright said via email. Our contacts believe this material will likely be imported to Europe, where there is already ample supply of Group II and Group III.
Observers are speculating that Korean producers may temporarily cut production if material cannot find a home elsewhere, Wright said.
Last week, Abu Dhabi National Oil Co. signed an exclusive seller agreement deal with Xiamen Sinolook for its Adbase Group III base oil, having already had a long-term seller deal in place. The company did not comment on the effects of the Covid-19 outbreak on existing Group III supplies from Abu Dhabi to China.
These flows are likely to be re-directed to other markets such as Europe, [the U.S.] and India, driving premiums for Group III down, Varaksin said.
Iran is also suffering due to the virus. One Iranian member of parliament from Qom tweeted yesterday that 50 people had died and 10 people were dying daily – the highest loss of life outside China. Irans central government said the number of fatalities was just 12 on Monday.
As of Feb. 24, all of Iran’s neighbours except Azerbaijan have closed their borders, severely reducing Iranian Group I exports to these markets.
The reason is the same – the virus – but the impact is different, Varaksin said. Because of the Chinese import drop, the Group III market globally is long, and because of the Iranian export decrease, the Group I market is short in the Middle East, India, Africa and Southeast Asia.