Kline’s May Index of Base Stock Production and Re-refining Cash Margins Provides Improved Results for Base Stock Producers
In January, 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. A more detailed description of the Margin Index can be found in the January release.
“As we predicted, in last month’s release of the Margin Index, there was an improvement in April’s conventional and re-refining profitability from the March results,” said Ian Moncrieff, who manages Kline’s price forecasting activities. “There were two principal forces acting to raise base stock production margins in April. The first was the anticipated narrowing of VGO cracks, by over $2/Bbl between March and April, as pressures on middle distillate supply eased. Second, the round of base stock posted price increases, and TVA reductions, which came about during March were in full effect during April. Group II base stock pricing during April, on a volume-weighted basis by viscosity grade, increased by more than $3/Bbl over March, and by $4.50/Bbl over February pricing.”
While these short-term improvements in profitability are welcome, margins are still insufficient relative to historical norms. Kline remains concerned about the impacts of the significant amount of new Group II and III capacity expected to start-up over the next two years. Barring unexpected growth in global lubricant demand, accelerated closures of under-performing Group I (and perhaps even Group II) assets are inevitable, as global capacity utilization drops and margins fall to cash breakeven levels or below. Shell’s end-April announcement of a plan to close its last Group I plant, at Pernis in the Netherlands, is symptomatic of the over-capacity malaise.
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.