ILMA Compoundings - January 2020 - 15

Global Average Operating Rates-a by API Groups, 2018
100%
90%

Impacted by a flood of Group II
capacity, especially in China

80%
70%
60%
50%
40%
30%
20%
10%
0
Group I

Group II

Group II+

Group III

Group III+ Group IV

Naph.

Total

Operating rate calculated as total production in a calendar year as a
fraction of the effective capacity.

At a global level, the supply of Group I, II and II+ exceeds
demand, while Group III, III+ and naphthenic are generally
in balance.
Looking ahead 10 years, while no increase in demand is
expected, there is a strong pipeline of new plants and additional basestock capacity on the way. Currently available
public announcements suggest that 5 million to 5.5 million
tons of incremental capacity, mostly Group II/II+, will be
added. This does not bode well for a market where demand
is forecast to grow at a paltry 0.4% CAGR. This mismatch
between the rate of growth for capacity and demand casts an
unfavorable scenario for basestock producers. In a scenario
where the basestock market is plagued with a flat demand
outlook in the wake of consistent capacity additions, the
only way margins could be restored is by commensurate
capacity retirals. Forecasting how much, when and where
these capacity retirements would happen is an extremely
difficult task. However, it is anticipated that IMO 2020 will
bring some relief.
IMPROVED MARGINS AHEAD?
The IMO 2020 regulation, which comes into force on Jan.
1, 2020, cuts global sulfur limits for fuels used onboard
seagoing ships from 3.5% to 0.5%. This has wide-reaching
investment implications for vessel operators and the world's
marine fuel producers. While IMO 2020 may have several
direct and indirect implications on the basestocks market,
one such fallout could actually prove to be a blessing in
disguise, as it may help to improve basestock margins.
It is highly likely that most shippers will choose to comply
with IMO 2020 by burning low-sulfur fuels rather than
installing exhaust gas scrubbers. As a result, demand for
high-sulfur fuels is expected to decline. This scenario means
refineries with heavy equity in high-sulfur fuel oil (HSFO)
production might struggle to find an alternate market for
their products. Those that cannot invest in the upgrades
required to produce low-sulfur fuel oil may be under threat.

If the refinery also produces basestocks, capacity shutdown
here could also be expected. Currently, it is difficult to
forecast just how much capacity would be rationalized, and
from where. However, Group I producers in Europe appear
to be the most vulnerable.
In addition, as demand patterns change, the price difference between low-sulfur distillates and gasoil versus HFSO
will widen. It is likely that those refineries with surplus
hydrocracking capacity will choose to divert vacuum gasoil
from basestock to distillate production. This action would
again help to ease basestock overcapacity.
There is still much uncertainty ahead for Group I, II and
II+ producers. However, the changes arising from IMO
2020 could help them to partially move toward equilibrium
in the mid-to-long term. That said, the market could be
expected to face considerable inter-API group competition
as blenders explore options to optimize their costs and
develop new market-positioning strategies.
The global basestocks market will continue to face
challenges, but perhaps there is a glimmer of hope in 2020
as the impacts of the IMO regulations on all the industry
stakeholders become clear.
NEW REPORT ON GLOBAL BASESTOCKS
Kline has been publishing the Global Basestocks Market: Analysis
and Opportunities study for over a decade, and the latest report
includes a market appraisal to 2028. The report provides a
comprehensive supply and demand analysis for different API
groups at a global level and by key regions. Manufacturing cost
estimates and market profiles of nine countries, including the
U.S., Russia and China, are also included.
In addition, readers will gain an analysis of current pricing levels and price forecasts, based on a robust model, for
Group I, II/II+ and III in Northwest Europe, the U.S. Gulf
Coast and Northeast Asia.
To read more about the study, visit www.klinegroup.com/
reports/y533.
1. Excluding demand arising from non-lubricant applications such as
drilling fluids, solvents and fuel blending, among others.
2. Effective capacity: total amount of basestocks a plant can produce in a
year when it is available for production. It excludes the portion of the year
when a plant is down either for planned (e.g., maintenance turnarounds)
or unforeseen circumstances.

Kumar is project manager at Kline Group. He can be
reached at anuj.kumar@klinegroup.com.

http://www.klinegroup.com/reports/y533 http://www.klinegroup.com/reports/y533

ILMA Compoundings - January 2020

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