CHONGQING, China – The base oil market in China has become much more favorable for lubricant blenders in recent years with easier access to a wider variety of sources. That was the consensus at last months CBI China Base Oil Summit here. Several speakers predicted that it will remain a buyers market with low profit margins for the foreseeable future.
The conditions of todays market are a stark contrast to a decade ago. Insiders at the CBI conference, held Sept. 11-13, agreed that the change occurred because of an increase in the number of suppliers. At the turn of the century, the market was controlled by two nationally owned integrated oil companies – Sinopec and PetroChina. In 2001, Sinopec Lubricant Co. Manager Zeng Haiying said, the two giants were responsible for 80 percent of the countrys base oil supply. By 2012 their share had fallen to 44 percent, even though the volume of their output had decreased only slightly, from about 3 million metric tons to 2.8 million metric tons.
The dominance of Sinopec and PetroChina eroded because steady increases in imports combined with the entry of other domestic players. Imports rose from 550,000 tons in 2001 to almost 1.9 million tons in 2012, Zeng said. Over the same period, other domestic production jumped from 200,000 tons to 2 million tons.
The two oil giants have lost their dominance, Zeng said.
China National Offshore Oil Co. is the third largest domestic supplier, with base oil plants in Huizhou and Binzhou. Other Chinese producers include Hainan Handi Sunshine and a military-owned facility in Panjin. Singapore, Taiwan and South Korea are the largest sources of imports, according to ICIS C1 Energy Information Manager Ma Yiqin, responsible for 32 percent, 24 percent and 22 percent of imported base oils, respectively.
Chen Jun, general manager of base oil trader Jiangsu New Jiyang Group, said imports and new domestic suppliers have not only lessened the market control of Sinopec and PetroChina, but also loosened supply, made base oils more affordable and led to more marketing by suppliers. In particular, Chen said, prices for API Group II and III oils have fallen because supply of those grades is long. Group I oils, in contrast, are short, and their prices have risen, though they remain lower than the other grades.
Lee Seow King, manager for business development at Malaysias Petronas Base Oil Sdn. Bhd., said the changes in China have coincided with large influxes of API Group II and III capacity around the world. As a result, he said, the global market has a significant amount of over-capacity. Lee added that the overhang will probably persist for the foreseeable future, thanks in part to the likely construction of more capacity in coming years.
More and more hydrocrackers will be built to meet the growing demand for low-sulfur diesel, he said, noting that some, though not all, refiners end up building base oil plants to convert hydrocracker bottoms into Group II and III base oils.
Lee observed that base oil prices in the past have seen spikes and steep drops due to events such as hurricanes, wars and recessions. But he contended that the current oversupply – and the downward pressure that it exerts on base oil prices – will continue for years.
The current situation is different, he said. This oversupply is not temporary nor event driven. It is man-made.