Asia’s Independents Face Dim Outlook


SHANGHAI – Independent lubricant blenders throughout much of Asia will likely be forced out of business in coming years due to inability to obtain base stocks, an industry consultant warned this month.

Harland Bulow of Tri.Zen International told the 10th Annual Fuels& Lubes Asia Conferencehere on March 5 that more and more blenders will find themselves scrambling for their main ingredient, despite the fact that base oil capacity in Asia is significantly greater than demand and looks to remain so for the foreseeable future.

The problem, he said, is that the region does not make as much base oil as it could and that the barrels it does produce are sometimes not a good match for its needs. In addition, much of the oils that are produced are not available to independents.

As demand for high-quality [lubricants] increases, I think many independents will go out of business, Bulow said.

Like other speakers at the conference, Bulow noted that nameplate base oil capacity in Asia – 14 million metric tons per year – exceeds the 11 million tons needed for finished lubricant production. (Asias lubricant demand now accounts for nearly 30 percent of the worlds total, he said.)

The numbers show that Asia should be long in base stocks and prices should be weak, he said. Sorry, I am afraid that is not the reality.

Bulow, who is based in Bangkok, explained that many nations within the region have base oil deficits. The Philippines and Vietnam, which combine to produce 380,000 metric tons of lubes per year, have no base oil plants at all. Australia, after losing two of its four base oil plants, produces only 60 percent of the base oils needed to meet its lube production.

The Indonesian market is dominated by state-owned Pertamina, which could make enough barrels to meet total domestic demand, but produces too little of heavy grades. Thai blenders rely on imports because of the instability of its two domestic base oil suppliers, Bulow continued.

China technically has nearly enough capacity to meet domestic base oil demand, but is hampered by logistical constraints, unstable feedstock supply and the slow pace of base oil quality upgrades. Multinational lubricant marketers use their own base stocks and the market imports 300,000 tons per year. India – the regions other big, bustling market – also suffers from underutilization and imports a whopping 500,000 tons per year.

Japan has capacity to produce 1 million more tons of base oil than it uses, but refiners make only enough to satisfy domestic demand.

Singapore is the major source of excess capacity, producing nearly 2 million tons per year and using only 200,000 tons, Bulow said. However, most of that production comes from big plants operated by major oil companies, which keep much of their supply in house for their own lubricant production.

The other problem for blenders, Bulow said, is that the base oil market has become much more complicated than it used to be, due to growth in demand for Group II and Group III oils.

In the past, we always had to identify the numbers by grade or viscosity, solvent neutral 150, solvent heavy neutral 450 or 500, and bright stock, he said. That was pretty easy. Refinery production generally matched the demand split, we came close to having balanced barrels and we assumed that the small amount of bright stock we needed would be more expensive than other grades.

But now we need to identify supply and demand needs by group type as well. Are we talking Group I or Group II or what? Not only is the market more fragmented, he said; Group II and Group III plants produce fewer barrels of heavier grades, which are especially needed for motor oils in Southern Asias warmer climes.

To illustrate the extent to which base oil availability has already tightened, Bulow noted that solvent neutral 500 sells for $435 per ton on the spot market in Singapore today, compared to $345 just over a year ago. He predicted that the trend will continue and ultimately price many independents out of the market.

Bulows presentation differed at least in tone from another given by Tan Thie-Chew, territory manager of base stocks for ExxonMobil Asia Pacific Pte. Taking a more global perspective, Tan said that additions to worldwide base oil capacity have more than offset closures in recent years. He also noted that most new capacity has been for Group II or Group III and that more than half of these projects have been in Asia-Pacific.

Tan acknowledged that the regions continued demand for Group I heavy neutrals could lead to a viscosity grade imbalance as supply continues to shift to premium stocks. But he suggested that potential shortages could be met in any of several ways: imports from over-supplied Europe; improved utilization of Asian refineries; or reformulation of finished lubes.

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