Asia: Demand for Group II/III Grows


NEW YORK – Asias taste for eco cars that go at least 65 miles on a gallon of fuel, the intimate relationship between diesel fuel pricing and API Group III availability, and the growth of high quality base stock supply in the Straits of Melaka are three key factors driving the Asian base oil market, a Petronas executive said.

Abu Hanzalah Abu Bakar, base oil sales and marketing manager for Malaysian national oil company Petronas, provided an overview of Asias base oil market at the ICIS Pan-American Base Oils & Lubricants Conference here earlier this month. Whatever happens in the Asian market has impacts worldwide, Abu Bakar noted. For example, Petronas, which started production of Group III base oils at its Melaka refinery last month, is now opening a distribution center in Santos, Brazil, to serve the South American market.

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Asian Supply/Demand
Before addressing the regions base oil outlook, Abu Bakar cautioned that his presentation is based on normal times, and the last few months have been abnormal. Now there is a severe oversupply of base oil, diesel and gasoline. This will trigger reduced prices, which will reduce supply. This will lead to recovery.

Asia – defined as the huge region east of Pakistan – represents 32 percent of the worlds base oil capacity today, Abu Bakar said.

Southeast Asia, including Thailand, Malaysia, Indonesia and Singapore, produces 8 percent of the worlds total: 2.7 million metric tons per year of Group I, 360,000 t/y of Group II, and 650,000 t/y of Group III. The Indian subcontinent, Abu Bakar continued, has capacity to produce 1.32 million t/y of base oil, about 3 percent of the worlds total.

Northeast Asia is one of the worlds most vital areas of base oil production, Abu Bakar said. South Korea is the worlds largest exporter of hydrocracked base oils. The countrys capacity includes 130,000 t/y of Group I, 1.64 million t/y of Group II, and 1.46 t/y of Group III. Japan has total capacity of nearly 2.2 million t/y.

Chinas current capacity stands at nearly 4.7 million t/y, with new projects on the drawing board. The majority of the base oil plants in China produce Group I. China is a major importer, but right now is not importing, said Abu Bakar.

Asias key merchant suppliers of base oils are located in South Korea (SK Energy, S-Oil and GS Caltex) and on the Straits of Melaka (Petronas in Malaysia, SK/Pertamina in Indonesia and ExxonMobil and Shell in Singapore).

Turning to demand, Abu Bakar estimated that the region currently consumes about 12.76 million t/y of base oil, primarily Group I, which comprises over 82 percent of that total. With Group II prices falling and automakers promoting 0W oils that require Group III oils, Abu Bakar predicted that demand for high quality base oils will increase significantly in Asia in coming years.

Abu Bakar estimated that total regional demand will reach 13.9 million t/y by 2012, with Group Is share shrinking to 75 percent. Group II will likely account for 21 percent, and Group III will account for 4 percent.

Asias Group I is generally not exported, Abu Bakar noted; there are very few merchant sellers of that grade. However, Asias excess Groups II and III are flowing from South Korea and the Melaka Straits to the United States, Europe and throughout the world. By 2012, when new supplies of high quality gas-to-liquids base oils are predicted to be produced in the Middle East, trade flows will likely shift, with GTL going to China and Japan. Base oils originating in South China may also flow to Europe.

Regional Drivers
Three key developments are driving Asias base oil market, Abu Bakar said. The first is Asias move toward fuel economy. This is typified by eco car projects like Thailands. Thailand is the largest vehicle producer in Southeast Asia, and the worlds 14th largest, putting out 1.13 million units per year at latest count. The countrys move to smaller, more efficient cars is seen as a solution to the challenges of high oil prices and economic uncertainty.

The Thai eco cars fuel consumption must be under 5 liters per 100 kilometers (65 miles per gallon); its emissions must meet Euro 4 or higher standards; and the cars must meet United Nations full-front and side-impact safety specifications. Thailand expects to produce 700,000 eco cars per year for export by 2013. And all of these cards will need 0W or 5W engine oils, which in turn require Group II+ or III base oils.

India is Asias fourth largest automaker, Abu Bakar continued; it is developing fuel efficiency standards to be in effect by 2015. And China, the regions second largest automaker, is doing the same. Asian countries are implementing advanced fuel economy initiatives that will require Group II and III base oils, Abu Bakar said.

A second factor, Abu Bakar said, is the diesel factor, the intimate relationship between diesel pricing and Group III base oil availability from refineries that use hydrocracker bottoms as feedstock to produce Group III.

Since diesel is the primary fuel that drives the Asian economies, the needs of base oil refineries are secondary, Abu Bakar explained. Fuel hydrocrackers are designed to produce a certain amount of diesel and the balance, the bottoms, can be used to make Group III. However, these production rates are adjustable. When fuel demand and prices rise, the hydrocracker can be adjusted to make more diesel, leaving less feed for the base oil refinery. Less feed of course means less base oil. But it also can change the quality of the bottoms, which can result in quality variations in the finished base oils. Thus, said Abu Bakar, Chinas diesel demand will affect Group III base oil supply.

The third factor, said Abu Bakar, is the rise of the Straits of Melaka as the new, high quality base oil center, joining South Korea and the U.S. Gulf of Mexico as the worlds major high quality merchant supply sources. But unlike other areas, he pointed out, the Straits of Melaka are safe from typhoons. And the refineries, like Petronas, that are not dependent on fuel hydrocracker bottoms can assure their customers of consistent quantities and quality.

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