LONDON – The Latin American base oil market is going through a challenging time as its top economies – Brazil and Mexico – underperform and domestic base oil production falls, according to an industry observer.
The United States is the main supplier in the region, but shipments from there decreased at the onset of the coronavirus pandemic in 2020 and have not recovered yet. Neither has the region’s base oil production, said Kauanna Navarro, base oil market reporter at Argus.
Trade flows between the United States and Latin America have been disrupted by shifts in demand and supply, along with geopolitical tensions, she told the Argus Global Base Oils Conference held here Feb. 22.
Base oil buyers in the region are subjected to fundamentals in the U.S. market “and they are looking for opportunities to secure more supplies of all grades from other regions, after the arbitrage from Asia and Europe became more attractive.”
Argus found that the Latin American virgin base oil capacity is consisted of eight API Group I and two naphthenic base oil plants.
Mexico’s Pemex has capacity to produce 6,000 barrels per day of Group I base oil, Venezuelan PDV two trains in Amuay and Cardon have capacity to produce 1,250 b/d and 4,800 b/d of Group I base oil. In Colombia’s Barrancabermeja, Ecopetrol operates a 900 b/d Group I plant. Curacao’s Refineria Isla has capacity to produce 5,000 b/d of naphthenic base oil. The two plants in Argentina, YPF’s La Plata and Raizen’s in Buenos Aires, have capacity of 5,700 b/d and 1,500 b/d of Group I base oil respectively. In Brazil, Petrobras has two Group I (11,200 b/d in Duque de Caxias and 1,750 b/d in Sao Francisco do Conde) and one naphthenic base oil plant in (1,290 b/d in Fortalezza).
Argus found that the Latin American production has been declining over the last decade and that all of these base oil units are old and need upgrades or repairs. On the other side, the plans to invest in Group II production units in the region have been deleayed, or scrapped completely.
“None of these plants have been official shut down, yet none of them are using their full nameplate capacity. In fact, some of them haven’t produced base oils in years,” Navarro said.
“Local refiners do not want to invest in their modernization and these units require much higher operating costs compared to the large economy of scale of the U.S. Gulf coast refineries.”
Brazil is the market with the most consistent base oil production in the region. It is also the largest one, followed by Mexico.
Brazil’s domestic Group I base oil production rose from 130,000 t/y in Oct. 2020 to around almost 150,000 t/y in Mar. 2021, as refinery run rates surged to meet the post COVID-19 lockdown demand recovery. The production normalized in 2022, falling below the 2020 levels at around 90,000 t/y, Navarro said.
“Production issues and the lower base oil margins, compared to other oil products is keeping the total production far from the nameplate capacity in the country.”
In 2021, Brazil’s finished lube demand rebounded sharply to around 1.4 million tons, after the COVID-19 lockdowns in 2020, but it slowed in 2022 to around 1.3 million tons on political uncertainty and slower economic growth. Argus said the country’s demand outlook for 2023 is uncertain because of likely policy changes from the new government.
Most of the Latin American markets are completely reliant on imports. For example, the Brazilin marketers are increasingly looking at import options and seeking overseas supplies to supplement the insufficient domestic production, Navarro said.
In 2022, Brazil’s base oil imports fell from the usual suppliers despite the lower domestic output. Largest base oil supplier to Brazil is U.S. that shipped around 500,000 tons of base oils last year. The country’s total imports amounted to around 700,000 tons in 2022. The rest was shipped from Asia and Europe,
“In this way, Latin American imports present a big opportunity for other key regions to clear their surplus supplies to these markets,” Navarro observed.
Mexico’s base oil production fell to around 200 b/d in 2022 and it failed to recover after the COVID-19 cutbacks. Prior to 2020 its base oil production averaged at around 2,000 b/d. She revealed that the Mexican buyers reported that Pemex haven’t sold any base oils since 2020. “It also stopped publishing its prices in Aug. 2021.”
Since 2019, the Mexican base oil imports fall on weak demand from diesel extender markets.
Navarro said that almost 1/3 of Mexico’s base oil demand is driven by the diesel extender market – Mexican buyers frequently use light-grade base oils to use as a diesel fuel – but that this demand has been slow since 2020.
This explains the much higher volumes of base oil imports to Mexico, which in 2019 amounted 23 million tons, and dropped to around 15,million tons in 2022.
The U.S. is the largest base oil supplier to Mexico which held more than 95% of the total base oil imports in the country in 2022.