Imports and exports represent only 5 percent of total U.S. base stock production and have little impact on the markets for API Group I and naphthenic base stocks. Other products however – like Group II and III – are significantly affected. Imports from Korea now dominate the U.S. market for Group III base stocks, and have enabled U.S. refiners to minimize their domestic production of this grade. For Group II stocks, international trade has proven to be an important component, with imports addressing market shortages in 2003 and exports balancing surplus volumes since spring 2004.

Changes in the North American automotive industry have sparked significant upgrades in finished oil quality and, subsequently, base stock selection. Last years introduction of ILSAC GF-4 passenger car motor oil has pushed the demand for higher-quality base stocks, including API Group II, II+ and III. Automatic transmission fluids have seen several performance upgrades, while the proposed PC-10 heavy-duty engine oil category will further increase demand for hydrocracked base stocks.

It is therefore anticipated that Group II and III base stocks will continue to flow from the Far East into the United States over the next several years.

For non-NAFTA trade, the United States remains a net base stock exporter. However, the gap between exports and imports has steadily narrowed over the past two years; imports increased 50 percent whereas exports grew only 15 percent during this period (see table above).

Oceans of Data

Data for this report was tabulated from public import/export records into the United States from October 2002 to July 2004. This provides a complement to Lithcons earlier study covering the 2000 to 2002 period.

The product data was divided into three categories, namely API Group I (including bright stock), naphthenics and specialties; API Group II; and API Group III.

The analysis excluded exchanges between Canada, the United States and Mexico (i.e., NAFTA) because the available data did not differentiate between base stocks and finished lubricants. Nevertheless, base stock exchanges within NAFTA are significant, with Group II flowing into the United States from Canada, and a smaller naphthenic volume imported into Canada. To the south, Group I base stocks (notably bright stock) and naphthenics flow steadily from the United States into Mexico.

Major Players

During the period studied, key U.S. base stock exports included Group I, particularly bright stock; Group II; naphthenics and specialties (see Figure 1). The largest exporter was ExxonMobil at 31 percent of the volume, primarily to their Latin American affiliates. Second was Shell/Equilon at 18 percent, with naphthenic exports to the Far East from its Martinez, Calif., and Deer Park, Texas, refineries that have since closed. Other prominent exporters included ConocoPhillips (Group II) and Nynas (naphthenics). Among trading companies, Sobit, Schumann Steier, and Chemlube arranged shipments to India, Nigeria and South Africa.

In 2003, exports of Group I and naphthenics averaged 6.2 million gallons monthly with Latin America the largest market (see Figure 2). This was dominated by the majors, with some 94 percent of exports representing intra-company sales by ExxonMobil, Shell and ChevronTexaco. Mexico was the exception, where third-party resellers dominated. Other export markets include Nigeria and India, where traders handle about 80 percent of the volume. India, Nigeria and Latin America comprise 92 percent of Group I and bright stock exports.

Naphthenic exports averaged 2.6 million gallons per month. This was broad-based in origin since there is no longer a dominant U.S. naphthenic player. The wide range of product applications and industries further suggest a complex market. Important exports were to the Far East, and partly associated with closures to the Shell Martinez and Deer Park refineries. Other U.S. naphthenic refiners are unlikely to replace this volume as the significant price advantage that naphthenics had over paraffinics has closed and the two are now considered at or near par. However, some naphthenics demand may shift to Group I, or there could be a regional shift where excess capacity exists – for example, Venezuela.

Until recently, North American exports of Group II base oils originated only from the Excel Paralubes refinery in Lake Charles, La., with shipments going to Italy, South Africa and India. In 2004, Motiva (Port Arthur, Texas) and ChevronTexaco (Richmond, Calif.) began sending Group II to the Philippines and Singapore. These appear to be intra-company sales supporting regional activities.

It is also of interest that during 2002-04, while China was importing massive amounts of base stocks – including hydrocracked light and medium neutrals from South Korea and heavy neutrals and bright stock from Southeast Asia, the Middle East and Europe – North America sent only a single shipment of transformer oil to China. Long term, the United States should play a greater export role to China, particularly with water white Group II stocks.

Several trends are anticipated in North Americas lube export market, including:

As the naphthenic and paraffinic price differential narrows, naphthenic exports will decrease.

Dwindling production of bright stock will mean an increased price. Exports to low-return markets like Nigeria and India will therefore be reduced.

As motor oil standards improve in Asia-Pacific and China, their imports of U.S. Group II stocks will grow.

Eye on Imports

Roughly 66 percent of U.S. base stock imports are Group II and III qualities, with 99 percent of such volume originating from three Asia-Pacific refineries: Group II from ExxonMobils facility in Jurong, Singapore; Group III from SK Corp.s refinery in Ulsan, South Korea; and Group III from S-Oils refinery in Onsan, South Korea (see Figure 3).

Russia, United Kingdom and Italy are the principle European sources of Group I imports, while Curacao (for naphthenics) and Brazil (bright stock) are Latin and South American sources.

Moving Concerns

Ocean freight is important in determining the cost of importing base stocks into the U.S. market. Over the past two years, freight rates increased worldwide by as much as 85 percent (or 8 cents per gallon) for cargoes from Europe and Asia to the U.S. Gulf Coast. Interestingly, despite sharply increased costs, the level of imports of Group II and Group III from Asia remained constant. This suggests that Group II and III base stock imports into the United States are demand-driven, where market needs override higher freight costs. At the same time, domestic U.S. refiners have determined that it is more profitable to maximize their Group II production while deferring the higher-cost and lower-yield Group III base stock demand to imports.

Base stock prices are traditionally lower in Europe than in the United States, as seen over four years of base stock postings from ICIS-LOR (see Figure 4). The differential ranged from 12 cents per gallon in second-quarter 2000, to 34 cents in April 02, and back to 17 cents in July 04. By December the gap had widened slightly, to 20 cents per gallon.

While the FOB (free on board) price differential has risen and fallen, the cost of bringing base stocks to North America has only increased. At this writing, the tanker freight rates from Europe to the United States were averaging 16 cents per gallon – double what they were in 2000 (Figure 5).

The typical cost to import and store base stock at a U.S. public storage terminal amounts to about 13 cents per gallon, which includes import duty (2 cents per gallon); storage (6 cents); finance (2 cents); loss contingency (1.2 cents); and insurance, inspection, taxes and fees (1.5 cents).

Add all this to the current ocean freight of 16 cents per gallon, and the overall cost to import base stocks from Europe into the United States reaches about 29 cents per gallon. Since the present price differential between Europe and the United States is 20 cents per gallon, there is no arbitrage opportunity using simple economics.

However, there may be other factors that override this cost analysis, including the balancing of global base stock supplies by multinationals, and the efforts of others to aggressively extend their global reach through discounting. This appears to be the present case with Russian imports into the United States.

Now Under Way?

Looking ahead, we anticipate several changes in the import/export market of base stocks within the non-NAFTA market.

Increased imports of Group II and III from the Far East due to North Americas full implementation of the ILSAC GF-4 engine oil specification, and increased demand from its ATF and heavy-duty engine oil sectors.

Increased imports from Russia, as it has significant capacity.

Reduced U.S. exports of naphthenics and bright stock, as domestic producers find better internal markets.

Shift of naphthenic volume to Group I due to lower naphthenic capacity, overcapacity of Group I, and a narrower price gap with paraffinics.

Continued push to higher-per-forming products, which will continue to favor Group II and III base stocks in the United States while putting increased pressure on API Group I refiners to either export their output or rationalize production.