ILMA Compoundings - May 2019 - 21

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Argus spot domestic vs export N100 ($/USG)
Argus spot domestic vs export N600 ($/USG)

But an extension of that strategy to move large volumes overseas faces additional complications over the coming months.
Indian demand for U.S. supplies is likely to ebb once plant
maintenance ends in South Korea and the Mideast Gulf. The
shutdowns were scheduled to be completed in April.
ROTTERDAM PLANT COMPLICATES EXPORTS
TO EUROPE
Moving more U.S. supplies to Europe also faces growing complications following the startup in February of ExxonMobil's
new 1 million tons per year Group II base oil plant in Rotterdam, Netherlands. The unit is Europe's first virgin Group II
base oil unit. Until the startup of this unit, the region has relied
almost entirely on imports from the U.S. especially, as well as
from Asia-Pacific, to cover its Group II requirements.
Availability of supplies from the new unit in Rotterdam
is expected to rise over the coming months. The supplies
are expected to curb the need for some of the large volume of regular imports from the U.S. and Asia-Pacific,
which would then need to find alternative outlets for those
supplies. Less-regular arbitrage shipments from the U.S. and
Asia-Pacific to Europe also face more competition in view of
the attractiveness of this steady volume of regional supplies
available for prompt delivery.
With the startup of the new unit in Europe, the U.S. market faces the prospect of more shipments remaining in its
domestic market rather than moving to Europe. It also faces
the possibility of Group II supplies moving from Europe to
the U.S. Such a scenario is feasible in view of the competitive trans-Atlantic freight rates compared with freight rates
between U.S. ports.

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Argus spot fob domestic Group II N100 vs 4-week-average US Gulf coast diesel ($/USG)
Argus spot fob domestic Group II N600 vs 4-week-average US Gulf coast diesel ($/USG)

With more supplies remaining in or moving to the U.S.,
domestic buyers have a growing incentive to limit their
inventories. Doing so would enable them to tap attractive
opportunities in the spot market and limit their exposure to the
possibility of lower prices. But such a strategy limits further the
ability for U.S. producers to adjust their prices higher.
MARGINS INCENTIVIZE SUPPLY RATIONALIZATION
More muted demand and rising supplies would keep
pressure on base oil margins. That would, in turn, increase
the need for a more permanent drop in base oil production
capacity to balance out the structural supply overhang.
The steady rise in demand for higher-quality base oils
has raised expectations that Group I plants face the most
pressure to close. But that pressure is more muted in the
U.S., where the oversupply of Group I base oils has been
smaller and more manageable than that of Group II base
oils. Group I producers have also been able to counter the
impact of weak base oil margins with profitable values for
their byproducts, such as wax.
Group III base oil prices have been steadier during the
first few months of this year, after weakening more than
Group II base oils at the end of 2018. The lower prices
at that time followed a surge in supplies to the U.S. from
Asia-Pacific. But the market has gotten support since then
from a firmer rise in demand compared with the Group II
market and lower imports from a major producer in the
Mideast Gulf.
Pocock is base oils editor at Argus and can be reached at
+65 6496-9944 or iain.pocock@argusmedia.com.

ILMA Compoundings - May 2019

Table of Contents for the Digital Edition of ILMA Compoundings - May 2019