SINGAPORE (ICIS) – China’s base oil demand is expected to recover in 2023 due to an optimistic outlook for auto recovery, while increased demand and ample supply of domestic grades of Group II could further reduce the dependence on imported loads.
Following the easing of strict COVID-19 lockdown restrictions, China’s vehicle production and sales are also expected to improve from 2022 onwards, thus the demand for vehicle lubricants, the main low consumer of basic oils. Additionally, demand for low viscosity base oils is expected to increase earnings in 2023 driven by rising passenger car sales, while demand for high viscosity base oils may decline with the lowest sales of commercial vehicles.
CHINA’S VEHICLE SALES RISE IN FEBRUARY
Vehicle sales in China reached 1.98 million units in February 2023, up 13.5% year-on-year and 19.8% month-on-month, according to industrial data as of March 10, driven mainly by government incentive policies and car manufacturers’ price cuts.
February output stood at 2.03 million units, up 11.9% year-on-year and 27.5% month-on-month, according to the China Association of Automobile Manufacturers (CAAM). while total vehicle sales in January-February decreased by 15.2% year-on-year to 3.63. m units.
Downstream lubricant producers have preferred domestic Group II base oils to imported ones, due to good quality, competitive prices and constant and stable supply. This is likely to extend to 2023, further reducing China’s import demand for Group II base oils in 2023. Import demand for Group I and Group III may remain stable or firmer.
In 2022, China’s apparent consumption of base oils is likely to have fallen from 2021, mainly as the resurgence of COVID-19 across the country affected demand in the economy. Most lubricant producers said their annual lubricant sales volumes in 2022 will likely be 30-40% lower compared to 2021.
Given lackluster domestic demand, China’s base oil imports have continued to lose ground while exports continued to rise in 2022. The trend may persist in 2023.
2022 CHINA’S BASE OIL IMPORTS DOWN, EXPORTS UP
China’s base oil imports were more than 1.78 million tonnes in 2022, down 16.2% year-on-year, data from the ICIS supply and demand database showed, meaning that imported Group II grades are being replaced by domestically produced base oils.
However, China exported around 143,557 tons of base oils in 2022, up 28.8% from the previous year, showing that demand for Group I and Group II base oils had increased in the Asian market.
Demand for base oils has improved significantly compared to the level before the Lunar New Year holiday (January 21-27), with downstream lube oil producers making purchases. Lube oil producers said their end-user orders this year have improved from a year earlier as end-user demand for lube oils has been recovering with the gradual lifting of strict COVID-19 restriction policy from December 2022.
Demand for China’s base oils from downstream lube oil producers is expected to remain firm in March as most lube companies have started building base oils from raw materials in preparation for the next peak traditional oil blending season in March.
However, local Chinese Group II base oil supplies are expected to fall amid plant changes. The supply gap in Group II is expected to be filled by increased import arrivals from late February amid significant import margins. Therefore, the overall supply and demand for the degree is about to be relatively balanced in March.
CHINA’S BASE OIL TRADE DEFECT TO REDUCE
In the medium to long term, Group II import volumes from South Korea and Taiwan, which account for half of total base oil imports in 2022, are expected to increase according to the Supply and Demand Database of ICIS, will resume their downward trend when the Chinese group changes. Units II end in mid-2023.
Chinese refiners are likely to seek new export destinations, as evidenced by increased export volumes over the past two years, albeit from a reduced base.
China’s total base oil exports rose 327% year-on-year and 29% year-on-year in 2021 and 2022, respectively, the ICIS supply and demand database showed.
Chinese state-owned refiners have an advantage over privately-owned refiners when it comes to base oil exports because of the lack of subsidies.
State-owned refiner Sinopec has lubricants manufacturing facilities in Singapore, and a large portion of its exports to Singapore are for its own captive use. You can get some import duty discounts on your imported crude oil when you export your base oils downstream. This is known as reprocessing trade in China and applies to most petrochemical products.
China’s base oil exports to Singapore alone constitute 70% of total exports in 2022, while much higher volumes have also been found in India, Malaysia, the US and Russia in 2021 and 2022.
Insight article from Matthew Chong i Whitney Shi
Additional reporting by Fanny Zhang
The 15th ICIS Asian Base Oils and Lubricants Conference will take place on March 15 at the Fairmont Hotel, Singapore. For more information, visit the event website.
