Guo Harn: Hello, everyone. And welcome back to the Argus "Base Oils Podcast," with a focus on the Asia-Pacific market. My name is Guo Harn, I'm the global lead for Argus Base Oils, and today with me, we have Tara and Li Li, associate editor. We have Victor from our Beijing office, who is the senior analyst for Base Oils, and finally, we have Chu Ren, our senior editorial analyst.
Our focus today is gonna be on the Asia-Pacific markets and the repercussions from the Middle Eastern conflict. So, probably I'll start off with you, Li Li. How are you observing the Middle Eastern market? Are there anything of note that we should know about that market in particular?
Li Li: Sure. So, the ongoing U.S.-Iran war continues to disrupt base oil trades in the region. So, the Strait of Hormuz remains effectively closed, which means that 20% of Group 3 capacities from that region is still being stranded within the region. So, this is pushing global Group 3 prices higher. Also, Iran is a key Group 1 producer in the region, and Group 1 supply is also constrained because of the U.S. naval blockade on Iranian ports, as well as its broadening sanctions on countries doing business with Iran.
Meanwhile, the Saudi Group 1 and Group 2 exports are also disrupted in the Red Sea because of the Yemen Houthis' naval blockade on Saudi Arabia, as well as various vessel attacks that is making vessel transits in the Red Sea challenging. So, Saudi exports to parts of the Middle East and Asia, including India, are affected, and these shipments will need to be rerouted via the Cape of Good Hope to reach some of these destinations, which will increase the logistics and delivery times.
Guo Harn: Li Li, earlier on, you mentioned a little bit about Group 3 producers. Are we hearing anything from the producers over in Bahrain, in Abu Dhabi, as well as in Qatar?
Li Li: So, I believe there are some loading happening in the region, but it remains to be seen when vessels can exit the Strait of Hormuz. Within the UAE, the domestic UAE producer continues to supply the domestic market, and recently prices have surged because of tight supply.
Guo Harn: Thank you so much for sharing. Tara, perhaps over to you, how are things developing over in the Asia-Pacific market?
Tara: So, in Asia, Group 1 and Group 2 prices are now under pressure. They have passed their peak in May. So, prices are under pressure because now supplies have recovered very strongly as refineries worked around their crude supply issues.
They managed to find alternative supplies, and they managed to overcome the crude slate issues. So, production levels are high and also incentivized to keep output high with stronger refining margins for base oils compared to competing fuels. At the same time, demand is also weaker within Asia because of a seasonal low in the second half of the year. Group 3 is still the exception. Supplies are tight in all the markets, and demand is very firm because of that. So, Group 3 prices are still firm at the moment.
Guo Harn: Okay, thank you so much. And over in China, Victor, how would you describe the Chinese market?
Victor: In China, I think Houthis should be the biggest story, as we previously relied on imports from the Middle East Gulf, from Qatar Shell, and from the UAE. And now this local supply chain has restructured. For many local vendors, the question is no longer price but supply availability. It has accelerated import substitution and lifted locally produced Group 3 prices, especially for premium quality [inaudible 00:03:56]liquid to the CTO supplies. Currently, CTO [inaudible 00:04:01] price has more than doubled in China, reaching to nearly 30,000 Chinese yuan per ton in early September, falling to about 11,000 yuan per ton in late February.
Meanwhile, Chinese Group 2 seems plentiful compared to Group 3. Locally produced Group 2 prices remain far more competitive than imported cargoes. The latest L150 discounts to imported Group 2 L150 should stay wide at almost 5,000 yuan per ton. As to Group 1, China has been limited to virgin Group 1 supplies. Key producers mostly produce for their own internal use, but there are large volumes of refined Group 1. The price increase also these days lifted by the former sentiments as the U.S.-Iran tension escalates again.
Chu Ren: So, if I may add, China's manufacturing PMI for the smaller manufacturers, they are actually posting expansion in the sector. So, PMI has actually risen to a 2-month high of 51.5 in August. So, this could also be supporting finished lubricants demand in the industrial sector.
Guo Harn: Fantastic. Thank you so much for sharing. If I can probably ask you, Li Li, how are things developing over in the Indian market? That market has been quite soft lately because of the monsoon season. Are you expecting things to revive with the end of this, of the rainy season?
Li Li: Yes, sure. So, demand has already been picking up ahead of the peak season that will start in October. And as we know, monsoon is coming to an end this month in September. And at this time, Asian refiners have been offering more spot cargoes into India market. Some of these refiners have been less active in the last few months because they diverted cargoes to higher-price markets. But as we know, Asian Group 2 prices have been dropping in the past few months. So, this is narrowing the gap between Indian buyers' and Asian sellers' price expectations.
But Indian buyers, as we know, favor the domestic supplies because they are more competitively priced, and the Indian refineries are maximizing their production because of high base oil premium over competing fuels. The only Group 3 producer in India is also maximizing its Group 3 production because of high Group 3 premium over Group 2. So, this high base oil productions is supporting India's exports. So, Indian exports have risen significantly this year, surpassing 75,000 tons in the first half, which is more than 8 times in the same period last year. So, this is contributed by largely Group 3 exports, which will continue because of a global shortage.
Guo Harn: That is actually quite an interesting development because India has always been a net importer of base oils. And right now you're saying that India is actually exporting or starting to export a lot more Group 3. Victor, for the Chinese market, are you observing a similar trend where Chinese producers are exporting more volumes?
Victor: Yeah, sure. I think since the U.S.-Iran war, I think the biggest opportunities, the biggest change is the arbitrage economics have totally flipped. China has now become more competitive in overseas market. Particularly, it has ample Group 2 capacity and the regional supply disruption has also boosted prices for China to target more exports to Southeast Asia and also India. We are seeing also premium-quality CTO supplies. They can be used to replace maybe TTO, as the quality is much better and the prices are competitive compared to current overseas cargoes.
Meanwhile, China is also trying to export maybe more Group 2 because the current local prices are more competitive. And we also see a very, very significant increase in China's exports. In the recent 3 to 4 months, China's exports have more than doubled, from about 10,000 ton to over 30,000 ton. The July exports should be over 40,000 ton, more than doubled from last year. Meanwhile, China's imports have reduced. The July imports fell by 32% from last year and down by 24% from the prior months. I think the overseas Group 2 is less attractive in China. So, we may see maybe a continual decrease in imports from the regional producers and see more opportunity for Chinese producers to target exports.
Guo Harn: That's really interesting. Victor, earlier on you mentioned about [inaudible 00:09:19] liquid base oils. How are the specifications of these base oils compared to other Group 3 producers?
Victor: In the China domestic market, some blenders who can no longer secure maybe TTO supplies, they are now turning to CTO. The quality is better than traditional Group 3, and some say it can be used to replace Group 3 price. So, the prices are also very attractive for the moment. Some overseas buyers are also trying to maybe secure some CTO supplies from China. We also have further expansion plans, so there could be more supply of CTO in China. It can be used maybe to replace some imports, and also there could be an opportunity for China to increase the exports of these cargoes.
Guo Harn: So, probably the next question is for you, Tara. Can you perhaps share two to three key developments that you are observing for the Asia-Pacific market?
Tara: So, the return of the India replenishment demand is quite timely. It's providing a market for South Korean producers to target, to clear their surplus supplies, given how Asian demand has been sluggish in recent months. So, in past months, South Korea has actually been turning towards buyers in U.S., Europe, and Latin America because of the higher prices that buyers are able to pay. But of course, those deals are challenged because of very high freight costs, long delivery timelines, and also difficulties in securing vessels while there are all these shipping disruptions taking place in the Middle East.
So, the return of India is, I would say, good news for our region. It helps to balance the supplies, and as we all know, India is you know, typically, a very large buyer that can absorb cargoes from our region, and it will help to keep the supplies more balanced and help to boost market activity again. Group 1 prices are somewhat stable now as the Thai refineries have been withholding offers due to concerns over securing their feedstock supplies while Red Sea shipping is still disrupted. But overall, buying interest is still rather low, as most blenders are quite comfortable with their current ton supplies. So, demand for spot is still rather cautious, although interest is there to secure some small volumes.
Guo Harn: Victor, next question is for you. Earlier on, you mentioned that China is importing fewer cargoes. Are there any differences in terms of the origin of these supplies?
Victor: Yeah, China is not making much progress in the downstream lubricant production, particularly when the country is continuing its electric vehicle expansion. So, the vehicle lubricant sales in China are not so good, and the competition is forcing a lot of local blenders to find more cost-effective supplies ranging from Group 2 to Group 3. And so, a lot of locally produced Group 2 and Group 3 base oils are widely used after the U.S.-Iran war because the prices are more competitive than the imported cargoes from South Korea, from Singapore, and Taiwan. And we are seeing some supplies that don't have any approvals are also used by even the multinational lubricant plants in China because the qualities can match, and the prices, yeah, sure, are far more competitive. Yeah.
Guo Harn: And Chu Ren, what's your view on the next 12 months? Are there any demand and supply factors that we should be looking at closely?
Chu Ren: So, if you look at Asia as a whole, you'll see that supply is actually highest right now. It's likely gonna keep increasing. You see crude supplies, most refiners have really diversified sources, and this will likely have a domino effect on other regions as well. So, if you look at Singapore, our key producer has increased production. Europe used to send supplies to Singapore because of lower production there, but now these supplies and the future supplies will likely stay within Europe. And U.S. is also a key supplier of Europe. So, once supply rises in Europe, U.S. producers will likely divert more supplies to the domestic market and also in Latin America. And with supplies rising in Latin America, we have South Koreans competing with the U.S. We are likely gonna see downward pressure on prices across regions.
Guo Harn: And are there any differences in terms of the price trends between Group 1, Group 2, and Group 3?
Chu Ren: Yeah, so for Group 1 and Group 2, it is more heavily correlated with crude prices and also crude flows. But if you look at Group 3 right now, it is very constrained. Twenty percent of the world's production capacity is gone. Yields are likely lower, and also some refiners are also increasing Group 3 yields at the cost of Group 2, right? So, Asia is actually a key producer of Group 3 now. And we see that demand for Group 3 is actually very sticky. You need Group 3 base oils for premium engine oils, and this demand is [inaudible 00:15:24] go away. So, with Group 1 and Group 2 supply rising faster and Group 3 supply not rising that much, we see some cargoes here and there, but we see prices still increasing. So, most likely Group 1 and Group 2 prices will decrease faster than Group 3 prices.
Guo Harn: Naturally, quite a bit will depend on whether the Strait of Hormuz reopens. But from our intelligence, we think that really Group 3 prices also have quite a capacity to drop, namely because of so much import substitution over in China and India, which reduces quite a bit of import requirements, especially in the future when many of your OEM blenders, like Victor mentioned, have started to use more domestically produced volumes.
Well, our time is running out. So, thank you all so much for joining us today. If you'd like more information, please feel free to visit the Argus Media website. Thank you so much.
