North China Group II base oils demand to grow on Group I shortfall

SINGAPORE (ICIS)–North China will see growing demand for Group II base oils in line with tight supply of Group I base oils due to closedown of a major Group I base oils unit, market participants said on Thursday.

Sinopec Beijing Yanshan, the sole Group I base oils supplier in north China, closed a 300,000 tonne/year Group I base oils unit at Beijing in late October due to shortage of crude oil, the raw material for base oils production, a company source said.

Crude oil supply from PetroChina’s Daqing oilfield, the major supply source of crude oil for Sinopec Beijing Yanshan has stopped since early September because of failed negotiations.

“Sinopec and PetroChina have been negotiating on crude oil supply since the second quarter of 2015. But the negotiation failed eventually because PetroChina has to secure crude oil supply to its own base oils subsidiaries while the margins of crude oil supply to Sinopec are low,” said the source.

As a result, Sinopec Beijing Yanshan had to close the unit after exhausting its crude oil inventory.

“Closedown of the unit may cause a supply gap of around 20,000 tonnes of Group I base oils on a monthly basis in north China,” a source from Sinopec Lubricant said.

To fill in the gap, Sinopec may increase the operating rates of two 400,000 tonne/year Group I base oils units respectively located at Shanghai municipality and at the Maoming city in Guangdong province, and allocate outputs from the two units to north China.

Otherwise, downstream lubricant producers may turn to Group I base oils imported from Russia or Group II base oils to secure their lubricant production, added the source.

However, importers in north China kept reducing their Group I base oils imports from Russia in consideration of low quality and poor margins, local importers said.

“The spread between Group I base oils and Group II base oils imported from Russia is narrowing while prices of Group II base oils remain high. It is squeezing our margins,” said an importer.

Therefore, spot supply of Russian Group I base oils will be limited in 2015.

Meanwhile, private lubricant producers in north China were more interested in Group II base oils in view of ample supply and low prices, so they reduced purchases of Group I base oils, they said.

Some of them began to use Group II base oils produced by private refiners in Shandong or imported from South Korea and Taiwan to supplement Group I base oils for lubricant production.

This will accelerate substitution of Group II base oils for Group I base oils in lubricant production in north China.

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Focus article by Whitney Shi