Asia Base Oil Price Report

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ExxonMobils announcement of its plans to expand API Group II capacity in Singapore caught many by surprise at the ICIS Asian Base Oils conference that took place in Singapore June 26-27. Market participants expressed some bewilderment that the producer would be expanding its capacity when the prospect of an oversupplied market continues to loom on the horizon.

ExxonMobils Jurong, Singapore plant currently has a capacity of 25,000 barrels/day of Group II base oils, according to LubesnGreases 2013 Guide to Global Base Oil Refining, and the expansion is expected to be completed by early 2015. Last February, ExxonMobil had also announced plans to expand Group II and II+ production capacity at its Baytown, Texas, base oil plant by early 2015.

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Aside from speculation about the amount of additional product expected to come on stream -information that was not revealed by the producer – there were heated discussions about the potential impact that the added material would have on the market. One industry player said it was difficult to say how the tsunami of base oils expected to hit the market in the next few years would be absorbed. Earlier this year, estimates showed that global total capacity could grow 10 percent in the next two years alone, and this figure was calculated without taking into account the added capacity in Singapore.

Some market sources said that ExxonMobil was adding capacity to ensure supply of raw materials for its own downstream operations, and expected only limited impact on the general market, but others still worried about the growing competition among suppliers to find potential buyers for their product.

The Singapore expansion is the newest addition to a string of other projects which have recently started up, or will be coming on stream not only in Asia, but also in Europe and the U.S. in the next couple of years.

In the Group II segment, SK Lubricants reconfigured 300,000 ton/year train in Ulsan, South Korea, was slated to start production of 500N last week, with commercial product expected to be available in the second half of July. Most of this product was anticipated to be shipped to contract customers in China, sources said.

Also within the Group II segment, Sinopec Yanshan will be bringing a 300,000 ton/year plant in Beijing, China, on line later this year.

In the U.S., Chevron is preparing to commence production at its 1.2 million ton/year plant in Pascagoula, Mississippi, in late 2013, with commercial product expected to be available in early 2014.

In the Group III sector, SK-JX Nippons 1,300,000 tons/year plant in Ulsan started production last year, while SK-Repsols 660,000 tons/year Group II/III plant in Cartagena, Spain, is under construction and is scheduled to come on-stream in the second half of 2014. Takreer-Nestes 600,000 tons/year Group II/III plant in Abu Dhabi will start operations in late 2013.

In Korea, Hyundai Oil Bank-Shell is planning to start its new 650,000 ton/year plant in Daesan in the second half of 2014.

In China, a large portion of Group I capacity is earmarked to be replaced by Groups II and III through reconfigured production processes. Sinopec is investing in new Group II and III capacity at Yanshan and expanding Group II output at Jingmen during 2013. Sinopecs production is expected to account for at least 70 percent of China’s total Group II/III base stock output by 2015.

All this new capacity is expected to exert downward pressure on pricing as it is likely to outpace demand, particularly at a time when there are still uncertainties surrounding economic growth on a global scale.

The debate between Group I/II producers and Group III suppliers about the viability of finding outlets for their product in coming years was another of the underlying themes discussed at the conference. Group I production is expected to shrink as producers continue to upgrade plants to Group II base oil production, given that Group II can be used for a wide variety of applications and have better antioxidation properties, among other advantages.

One of the producers explained at the ICIS event that Group I and II base stocks have the widest application, and underscored that Group II can be used in 97 percent of applications, while the use of Group III is more limited. Another producer added that Group II provides excellent performance in automotive and industrial applications.

Group III producers see their category of base oils as offering the biggest promise in terms of future demand growth, because of the stricter fuel economy and emission controls expected to be imposed by governments around the world, and the need to use a purer type of base oil for high performance lubricants production.

As market discussions turned to the short-term outlook, however, supply of a number of grades was expected to remain tight in Asia in the next few weeks on the heels of recent, ongoing and upcoming turnarounds. The snug market conditions have allowed spot prices to enjoy a period of relative stability. Furthermore, a number of suppliers stated that they hoped to increase offer prices for July shipments because margins continue to be minimal and production costs have not abated.

A South Korean producer whose Group III plant completed a turnaround in April/May is scheduled to start a one-month maintenance shutdown at its Group II plant in July. Consequently, the producer will not be offering any spot cargoes until September at the earliest.

A second northeast Asian producer was also heard to have little extra product available for spot business after it has fulfilled its contract commitments. The supplier was considering lifting its July offers into southeast Asia and India by $10-30/ton, especially for the heavier grades, because of tight regional market conditions. However, it conceded that raising prices in India may be difficult because of the recent depreciation of the rupee. The supplier also said that demand in China was improving, but import prices were still exposed to downward pressure, given adequate domestic availability.

A Taiwanese producer, whose plant will be taken off-line for maintenance in August and September, is building inventories to ship cargoes to its term customers during the outage. The producer expected to conclude only half of its regular monthly shipments to China in July, or approximately 20,000 metric tons, while the quantities will be further reduced to a third of its normal monthly volumes in August and September.

A second Taiwanese producers base oil plant is close to completing an annual turnaround and will not be offering any spot cargoes over the next few weeks.

In terms of pricing, participants said that the Group I ex-tank Singapore price spreads had widened over the last couple of weeks, with SN150 assessed at $1020-$1080/t, SN500 at $1060-$1160/t and bright stock at $1160-$1260/t this week.

On an FOB Asia basis, prices were heard at $940-$960/t for SN150, $990-$1030/t for SN500 and $1090-$1140/t for bright stock.

Regarding Group II material, prices were assessed at around $970-$1030/t FOB NE Asia for 150N and at $1060-$1110/t FOB NE Asia for 500N.

Oversupply conditions continued to weigh on Group III spot prices, with numbers heard at $1000-$1050/t FOB Asia range for 4 cSt, 6 cSt and 8 cSt cuts, although some indications continued to be mentioned at slightly higher levels for small-volume transactions.

In production news, Chinese Petroleum Corp.-Shell is expected to restart its Group I production lines at Kaohsiung, Taiwan, in early July, following yearly maintenance. Most term obligations were being met as scheduled, as the supplier built stocks ahead of the outage.

Formosa plans to shut down its 600,000 tons per year Group II facility in Mailiao, Taiwan, in August and September for a routine turnaround.

S-Oil will be shutting down its Group II facilities in Onsan, South Korea, in July for routine maintenance. The units are likely to be off-line for 30 to 40 days. The producer had completed a turnaround at its Group III unit in early May.

Hainan Handi in China will be shutting down its Group II plant for three months, starting in July. Industry sources said the shutdown was due to feedstock supply issues, but this could not be confirmed.

On the shipping front, only a handful of inquiries surfaced in Asia this week. A 600-metric ton parcel of base oil was expected to be shipped from Onsan to Singapore during July 10-20. A 1,000-ton cargo of 600N was being worked on to cover Ulsan to Merak between July 15 and July 25. A 2,000-ton lot base oil was discussed for Sriracha to Dongguan for end July lifting.

Upstream, August Brent settled in Asia at $103.14/bbl on July 2, compared to July numbers at $101.82/bbl on June 25. Crude oil prices rose on expectations that government data, due to be released on Wednesday, would show that U.S. inventories dropped significantly last week, reflecting increased demand in the worlds largest oil-consuming country.

Gabriela Wheeler, based in Japan, can be reached directly at gabriela@lngpublishing.com.

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