London, 9 October (Argus) — Margins to Ice gasoil for Group 1 solvent neutrals hit their lowest point in at least two and half years in early September, when many refiners were hoping that multiple refinery turnarounds, preceded by months of low buying from lubricant blenders, would help boost prices.
But instead of a price upturn, global demand fell and availability of Group 2 and Group 3 proliferated, depressing prices yet again. The consistently low margins, and influx of premium-quality base oils, have many in Europe wondering how long the market can last without further supply rationalisation.
“2013 will be a really bad year for base oils,” one refiner said. “If China and India do not start to buy, we are in trouble. Some refineries need to close.”
Consulting firm Kline estimated global base oils demand to be 38.1mn t in 2011, a 2pc year-on-year growth. Kline's outlook for the coming year is no better, with western Europe limping along below pre-recession levels and facing a long term lubricant demand decline — making competing globally even more important. Even with the recent closure of Petroplus' 320,000 t/yr base oil output at Petit Couronne in France, oversupply is weighing on prices.
Further pressuring the case for base oils is an evolving picture for fuels, which compete for vacuum gasoil feedstock. The growing need for diesel in Europe is boosting its returns; in September, around the same time base oils hit the low versus gasoil, diesel margins versus North Sea Dated Brent hit a nearly three-year high.
Indian refiner Essar Energy, which completed its purchase Shell's Stanlow refinery last year, evaluated its refinery slate, and its 260,000 t/y base oil production, and determined it will halt output when it concludes ongoing discussions with its term customers. Essar has said the base oils in Europe are oversupplied, and that the economics of its decision are clear, particularly since the production of base oils dictates the type of crude oil it must use.
PricewaterhouseCooper (PwC), which acted as administrator for Petroplus' Coryton plant in the UK said a “radical restructuring” of European refineries is still to come. At a recent presentation, PwC director Robert Turner said complexity, net cash margins and location are particularly important, adding that in order to survive, refineries “must be internationally competitive.”
These factors are exactly where European Group 1 plants come up short, as supply of Group 2 increased by 5pc globally in 2012, and Group 3 expanded by 45pc. This situation is particularly problematic for the several refineries that have to buy feedstock vacuum gasoil, or which produce it themselves but cannot easily shift their output toward the more profitable fuels.
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