China’s December base oils output falls

China’s base oils output edged lower in December amid weak end-user demand and blenders’ reluctance to build stocks.

Output fell even as China replaced its zero-Covid policy with a strategy of living with the virus.

The subsequent surge in infections in December impacted economic and industrial activity as factories struggled to maintain normal operations.

Weak end-user demand deterred blenders from building stocks ahead of the peak spring oil-change season.

Blenders’ low stocks and refiners’ muted base oils production raised the prospect of a sharper-than-usual rise in demand combined with tighter supply in the coming months.

Output of Group I, Group II and Group III base oils fell to around 321,000t in December, according to OilChem China.

The volume fell from almost 329,000t the previous month and by more than 40pc from year-earlier levels.

The sustained slump in production cut China’s total base oils output to 4.27mn t in 2022. The volume fell by 34pc from 6.45mn t in 2021 to a five-year low.

The fall in base oils output in December followed a gradual recovery in production in October and November as persistently low base oils supply lagged a fragile improvement in demand.

The tighter fundamentals during that time triggered a recovery in China’s domestic base oils prices relative to diesel and relative to Asia-Pacific base oils prices.

The trend incentivized domestic refiners to raise production and overseas producers to move more shipments to China.

China’s policy switch in early December to living with Covid raised the prospect of a further rise in demand in the coming months as economic activity revives.

The more immediate reaction was a slowdown in economic and industrial activity and weaker domestic base oils prices that made the arbitrage to China harder to work.

China’s base oils demand typically peaks in the weeks after the lunar new year holidays. Some blenders typically seek to build stocks earlier to lock in supplies at lower prices.

Weak demand and volatile prices deterred any such stock-building this time.

The trend raised the prospect of the need for a significant rise in base oils supply over the coming months to meet the expected pick-up in demand.