In January 2014, Kline & Company, a worldwide consulting and research firm serving needs of organizations in the lubricants and base stocks industry, introduced its monthly Base Stock Margin Index, a characterization of recent cash margin contributions in the U.S. base oil market over the past 24 months.
The Index estimates cash margin contributions associated with U.S. Group II base stock production. It simulates EBITDA before the deduction of corporate SG&A expenses for typical VGO-based virgin base stock plants and RFO-based re-refineries.
“While discounted U.S. postings for light and medium grades of Group II dropped by $0.10/gallon in August, there was a greater drop in Brent crude oil and U.S. VGO prices ($0.24 and $0.27/gallon, respectively), allowing both types of base oil refiners to improve gross margins over the past month. In terms of instantaneous profitability, the market is back near the high water-marks seen over the past two years, though well below standard costs necessary to support reinvestment. The underlying fundamentals are still not strong, and the embedded time lag between changes in feedstock and base oil price movements did not catch up with events until early September, when there was a round of posted price reductions in the light/medium grades announced by producers, ranging from $0.10-$0.15/gallon,” noted Ian Moncrieff, Vice President of Kline’s Energy Practice.
“In terms of recent changes in global base oil and finished lubricant demand, there is apparent strengthening in U.S. production of base oils, according to EIA data on U.S. ‘lubricant’ consumption (actually base oils). For January through June 2015, the EIA reports a 13% increase in U.S. ‘lubricant’ consumption over the first half of 2014. In addition, net U.S. exports of ‘lubricants’ have risen by 10% over the same period. This recent uptick in U.S. production has not been mirrored in consumption and imports of major lube-consuming countries where short term market movements are measurable. Chinese ‘lubricant’ imports are down by more than 100 kilotonnes for the first half of 2015 vs. the same period in 2014, while Indian imports are down also. Major markets other than the United States appear to be flat or somewhat down on 2014 consumption levels.”
For more information on the Kline Index, or to inquire about our pricing and margin analysis services to the base stocks industry, please contact Ian Moncrieff, Vice President (Ian.Moncrieff@klinegroup.com) at (973)-615-3680 in Kline’s Energy Practice.