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China: A Sponge for Base Oils

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Chinas lubricant demand continues to grow, bringing along with it a rapidly increasing appetite for API Group II and III base oils. And although its government-owned oil companies are making moves to produce more of these base oils, the nation will need to rely heavily on imports for years to come, attendees heard at the recent ICIS Asian Base Oils & Lubricants Conference.

Jinyuan Kong, vice director of oils research and a senior engineer in the marketing department of the PetroChina Planning & Engineering Institute, said Chinas domestic lubricants consumption reached more than 6.5 million metric tons in 2010, achieving a growth rate of 8 percent.

In the last decade, the average growth of lube demand in China is 5.6 percent, while that of the global market is nearly zero percent, or minus because the demand was up and down, she told listeners at the conference, held June 14 and 15 in Seoul, South Korea.

Domestic vehicle ownership was a key driver of this change, Kong noted. Vehicle sales in China totaled more than 18 million units in 2010, she said, ranking first worldwide. The possession of a civil car in China has kept up a [double-digit] growth, and rose more than 25 percent in 2010, she pointed out.

According to Kong, engine oil demand underpinned much of the lubricants demand growth in 2010 – especially gasoline engine oils, which had a growth rate of more than 18 percent.

The PetroChina official, who spoke in Mandarin with simultaneous translation to English, estimated that base oil consumption in 2010 in China included 56 percent API Group I, 25 percent Group II and III, and 19 percent naphthenic. (For comparison, LubesnGreases research puts API Group I at 56 percent of global demand, Groups II and III at 32 percent, naphthenics just 9 percent, and rerefined 3 percent.)

While Chinas Group II and III demand is lower than global demand, it is growing, she continued. More and more high-tier passenger cars are sold in China, so this high-quality lube demand is also growing dramatically, leading to more need for Group II and III base oils.

Kong noted that the base oil supply from state-owned Sinopec and CNPC (PetroChina) has remained stable in the range of 3 million metric tons a year since 2001. So growing volumes of imports have been needed to meet finished lubricants demand.

The quantity of imported base oils rose nearly 16 percent annually, climbing from 550,000 tons in 2001 and hitting 2.8 million tons in 2010. During that time, she said, the proportion of imported base oils used in China also increased rapidly, from 14 percent in 2001 to more than 33 percent in 2010. So one third of [base oil] we consume is imported, she emphasized.

Lubricants are essential to many different industries in China. The output of relevant trades in China in 2010 included 18 million automobiles, 26.6 million motorcycles, 627 million tons of steel, 1.9 billion tons of cement, and 776 million tons of tires. She pointed out that China produces a lot of tires and shoes, which means the demand for rubber processing oil is very high.

Based on our studies, total consumption of lubricants in China in 2010 reached 6.5 million tons, she said. That attracted a lot of suppliers, including the finished products, and also other oil products.

More than 342,000 tons of finished lubricants were imported into China in 2010, up 45 percent from 2009. Thats because last year we imported a lot of cars in China, Kong said.

According to Kong, multinational blenders in China bought more than 40 percent of the imported base oils in 2010, and 13 percent was bought by Chinese government-owned corporations.

Chinas base oil refining capacity is 63 percent Group I, 17 percent Group II and III, and 20 percent naphthenic, an imbalance that also dictates the need for imports. We see that [China] still needs to import a lot of the Group II and III oils, she stated. I think about 50 percent of what we imported in 2010 were Group II or Group III.

Principal sources of base oil imported into China in 2010 included Korea and Japan (37 percent), Sinapore and Malaysia (35 percent), Taiwan (12 percent), Russia (9 percent) and Uzbekistan (1 percent). These shares will likely change because of the impacts of the earthquake in Japan in March 2011, she pointed out.

Looking more closely at the outlook for finished lubricants, Kong said Chinas total demand is expected to grow from 6.6 million tons last year to 6.9 million tons in 2011, and to 8.2 million by 2015. On this basis, base oil consumption will likely be 6.1 million tons this year and 7.3 million tons in 2015.

The yawning gap between base oil supply and demand is projected to continue as well, because supply from the three China government-owned suppliers (PetroChina, Sinopec and CNOOC) is expected to only reach 3.3 million tons this year, and not quite 4.9 million tons in 2015. Domestic base oils cannot meet the demand, she stated. I think recently we have been focusing on trying to improve the quality and efficiency. We will try to supply more high-quality base oils in the future.

The ICIS conference also heard from Stephen Ames, principal of SBA Consulting, Pepper Pike, Ohio, who offered additional insights into Chinas market.

Ames noted that a major change taking place in China is the rapidly increasing demand for Group II and III base oils. Its happening a lot faster than most people though it would, he observed. Why? Its strongly automobile-related – China has become the worlds largest vehicle producer.

Most vehicles sold are foreign marques such as GM, VW, Mercedes and others, using global platforms. Whatever global platform youre using, its going to need to have an ACEA or API quality [engine oil], he emphasized. Which means youre going to be using Group II or Group III. A recent survey showed that 5W-30 now constitutes roughly 20 percent of the passenger car motor oil being used in China.

For example, some General Motors vehicles being made in Chinas region are using the companys proprietary Dexos specification for their initial fill of engine oils, which typically requires the use of Group III base oils. Drivetrain lubricants such as gear oils and automatic transmission fluids are also using lower viscosity base oils, Ames noted. Because of global platforms, they are looking for extended drain intervals or fill-for-life applications, he said. Cars produced in recent years are now coming back for service, and hopefully being filled with the same quality of oil recommended. Higher-quality lubricants are also required for Chinas many new industrial plants, he added.

Another trend in China is that international lube marketers such as Shell and Total are building or have built large blending plants there to supply local demand. Instead of importing top-tier Group II- and III-based lubricants into China, theyre bringing in the high-quality base oils to make the high-quality lubricants there, he pointed out.

Meanwhile, local blenders in China are recognizing they can do a lot more with Group II as their workhorse base oil, in place of Group I. Other than a few heavy viscosity applications, Group II can do the same thing as Group I, often at an additive cost savings, Ames said. It can also be used in places where Group I can no longer.

Another major change is the skyrocketing import of Group II and III base oils into China. In 2010, China imported a little over 2.1 million tons of base oil, he observed. A prorata figure for 2011 is still greater than that. The majority of it is Group II and Group III.

By Ames estimate, Asias total refining capacity for Group II and III has increased by 4.6 million tons per year since 1997, while its Group I capacity shrank by 1.8 million tons per year, mainly due to closures and upgrades. Excluding China, he gauged Asias paraffinic base oil capacity at 43 percent Group I, 35 percent Group II and 22 percent Group III. Even the Group I that is out there, most of that is in Indonesia and Thailand, and is increasingly needed in their home markets and less-available for export, he added.

Chinese refiners investment priorities previously focused on meeting fuels demand and converting refineries to handle imported sour crude, but they now are stepping up to the base oil challenge, Ames asserted. He pointed out that independent refiners such as Hainan Handi Yangguang Petchem, which is planning a plant with 200,000 tons of Group II capacity, are also entering the base oil business. Interestingly enough, Chinese national oil companies are starting to license other than their own technology, which is good, he said. Theyre now licensing some best-in-class technology. But dont expect China to become self-sufficient any time soon.

Chinas taste for better lubricants is accelerating its shift to API Group II base oil, and all three government-owned oil companies are working on projects to produce it in coming years, concurred C1 Energy Information Manager Nancy Shi, who also spoke at the conference via an English translator.

Some 37 percent of Chinas base oil production last year was what Shi called off spec – not finished to a quality suitable for making lubricants. Some domestic traders blend the off-spec oil with naphthenic grades, but as Chinas refiners upgrade their overall processes, production of such low-standard barrels will dwindle. And its happening rapidly.

During the 2011 to 2015 period, PetroChina plans to install hydrocrackers in its Daqing Petrochemical, Dalian Petrochemical, Fushun Petrochemical and Lanzhou refineries, to shift all towards Group II production, Shi said. An expansion at its Dushanzi petro-chemical site is expected to add 200,000 tons per year of Group II capacity, beginning this year.

According to Shi, Sinopec wont be a bystander in the race. Its Gaoqiao Petrochemical, Maoming Petrochemical, Jingmen Petrochemical and Jinan refineries are also mulling over additions or expansions of Group II base oil production before 2015. This year an expansion at the Yanshan Petrochemical refinery is expected to produce 300,000 tons per year of Group II base oils.

Shortly before the conference, China National Offshore Oil Corp. (CNOOC) completed the first train of a new plant at its Huizhou refinery, adding 3,800 daily barrels of Group II capacity; a second construction phase year will roughly double that next year.

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