Brazil will boost demand for base oils in South America in 2023 and is also expected to attract more supply from Europe and the US.
Market participants say South America will be the main destination for base oils in 2023 as an economic recession reaches Europe and the US. Inflation is running at multi-decade highs, with global central banks led by the US Federal Reserve pursuing the most aggressive monetary tightening in generations, and a recession is now increasingly expected in the US and Europe, according to economists from Deutsche Bank.
Brazil, the main importer in South America, is reducing base oils domestic production and investing in products with higher margins, which drives demand to import base oils from other markets.
Imports will rise as Brazilian production is expected to decrease in 2023 in response to lower base oil margins and regional production issues. This will make the country a target for US, Europe, and Asia-Pacific producers.
Also, Brazilian buyers claim that the quality of domestic production has been inconsistent and that output has been insufficient to cover domestic demand, especially for mid- and heavy-viscosity base oils.
During the Covid-19 pandemic, Brazil's Group I domestic base oil production hit a record low in 2020 because of reduced refinery operations and the closure of Petrobras' RLAM refinery. The facility was later sold to Acelem, the Brazilian refining subsidiary of Abu Dhabi's Mubadala. The unit has since restarted, which helped boost Brazil's Group I production in 2021, bringing total output to the highest level since 2014.
Looking back
Domestic production remained strong through the first half of 2022 but started to slow from June onward, putting total production for the year on track to be lower than in 2021.
The country's output in June decreased to almost 24,000 metric tonnes (t), down by 46pc from May and down by 37pc from a year earlier. Production from January-June dropped to a little over 236,000t, down by 7pc from 253,710t in the same period a year earlier.
Lower domestic production and a strong recovery in overall demand after 2020 boosted demand for domestic supply and supported price increases from June 2020 to July 2021. The increased supply provoked a return to historical buying patterns, causing prices to decline in the second half of 2021 through the first quarter of 2022. Brazil's domestic prices increased again from March to July 2022 because of seasonal demand, a global supply crisis and rising prices for oil and oil products after the start of the conflict in Ukraine.
In the first half of 2022, base oils supplies were tight globally — especially in Europe and the US — as refinery run-cuts and maintenance curbed production in both regions. Overseas supply options for Latin America were limited to term shipments and small spot volumes from the US and South Korea. Some small flexibag volumes of Russian supplies have resumed flowing to the region, but were increasingly limited. At least 24pc of the European Group I nameplate capacity was offline in June, according to the Argus supply index.
But demand in the second half of 2022 year was slower than the initial forecasts. The completion of European maintenance and a slow global economic recovery have combined to put downward pressure on prices.
Domestic prices in Brazil have been dropping since September, but buyers are still looking for product overseas. Regional production issues force Brazilian buyers to compete for heavy grades and bright stock — Group I products with the heaviest viscocity — with other South American buyers.
Market participants also affirm that this is the moment to increase Group II usage instead of being continuously dependent on Group I domestic production.
By Kauanna Navarro
