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June 13, 2017

Volume 7 Issue 8

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Group II/III Supply Shifts from Asia

SINGAPORE – Asia’s intensifying thirst for high-quality lubricants will soak up some of its API Group II and III surplus, but oversupply of high-performance base stocks will be more pronounced than ever as new sources pop up across the globe, said Kline & Co.’s Milind Phadke at a conference here last month.

“Global lubricant base stock capacity is far in excess of demand,” Phadke told the ICIS Asian Base Oils & Lubricants Conference on May 17. Capacity was approximately 56 million tons last year, yet only 35.7 million tons of base oils were consumed. The overhang is particularly pronounced for high-performance base stocks.

And it doesn’t stop there. “Nearly 6 million tons of new base stock capacity is in the pipeline, with almost half of it coming up in the Asia-Pacific region,” continued Phadke, who directs the United States-based consultancy’s energy practice.

Demand for finished lubricants is growing robustly in Asian countries such as India, the Philippines and Indonesia, he explained. But with the China and Japan markets constricting, “the overall finished lubricant demand growth in Asia has slowed down to slightly lower than the global demand over the next 10 years.”

The region will continue its “rapid shift” toward lubricants with longer drain intervals, better fuel economy and overall better performance, however. The percentage of passenger cars in Asia using low-viscosity motor oils such as 5Ws, for instance, will expand from 2016 to 2026, and those products will be increasingly formulated with Group III rather than Group II. Asia’s compound annual growth rate for Group II requirements through that period is just a shade higher than that of the whole world combined, but the projected growth rate for Group III demand is around 2 percent higher.

The shrinking usage of Group I is also more pronounced in Asia than it is worldwide, as formulators are increasingly substituting out that feedstock to make use of its Group II surplus.

Asia’s increased use of higher-performance base stocks won’t help balance supply across the globe, however. “New capacity additions will outpace new demand growth in Asia, and the emerging supply will alter trade flows,” Phadke said. “Suppliers in the Middle East have eroded the dominant position of Asia’s Group III suppliers in the United States and European markets,” he remarked. In 2010, there was no Middle Eastern supply of Group III to either market. Last year, the region accounted for around half of base oil imports for both regions. New capacity in Europe will also challenge Asia’s exports to that region and to North America.

“Asia was the lone big supplier of Group III base stocks,” he said. “But in the future, suppliers in Asia will … need to explore new markets for sustained growth … and find ways to retain and grow market share.” South America and Africa aren’t necessarily options at this point, he noted, as demand on those continents is still minimal.

North American refiners will also need to compete with the new units in Europe and the Middle East, and with upcoming capacity additions in China. With more than half of new Group II capacity being built in China, the region’s Group II surplus will only be exacerbated, Phadke concluded.

Across the globe, “There will have to be shutdowns and projects cancelled,” Phadke concluded. “Some Group I units will be closed or converted to Group II, but there are lower chances of Group I closures in Asia compared to other regions due to a variety of factors,” such as its reliance on that grade for marine lubricants, which are demanded more in Asia than anywhere else.