Who is Pushing up the Lubricant Price?


Despite the continuous reduction of the international oil price
since the beginning of 2006, the lubricant price in the domestic
market has kept fast increasing. Lubricant giants have made
price upward readjustments time and again.
   That period should however be the slack consumption season
of lubricants.
   Reasons for the price rise include the high price of lubricant
base oil in the international market and the forthcoming
readjustment to the oil product pricing mechanism.


Storm of price readjustment


The market price of lubricants has kept going up. The price of
Sinopec Great Wall lubricants has made repeated readjustments
on January 12th, February 6th, February 28th and March 6th. The
price rise covers almost all types of lubricants used in
automobiles, diesel engines, universal machinery and hydraulic
pressure systems. The total price growth margin has reached 10%.
   According to experts, the readjustment frequency and the
readjustment margin this time are widely different from 2005.
The total price growth margin for Great Wall lubricants reached
around 10% from January to March. It was already higher than the
comprehensive margin in the whole of 2005.
   In PetroChina, the price of all lubricants for vehicles and
partial lubricants for industrial applications also increased
by 6% in March 2006.
   In private firms, Beijing Tongyi Petroleum Chemical Co., Ltd.
also readjusted the selling price of its lubricants on February
15th and February 23rd. The price growth margin has reached 10%
- 15%.
   Lubricants produced by multinationals have also made price
readjustments, but the growth margin is not as high as domestic
lubricants.
  "There is no other option for us but follow the tide," said
a lubricant producer. "The price rise of base oil has hit us on
the soft spot. "
   In 2006 as the largest base oil supplier in China, PetroChina
has made two readjustments to the ex-factory price of base oil
in its refineries. On January 6th the price of base oil with low
viscosity was increased by RMB250 per ton and the price of base
oil with high viscosity was increased by RMB400 per ton. On
February 7th the ex-factory price of base oil in PetroChina
refineries was increased by RMB300 per ton. Sinopec Gaoqiao
Petrochemical Company Ltd. also increased the ex-factory price
of II type hydrogenated base oil on February 6th by RMB200 - 300
per ton.
   What should be noted is that the price upward readjustment
in 2006 is made on the basis of the stable price rise of base
oil in 2005. Consumers therefore have strong grievance.
   Data show that the price of base oil increased by 6% from
October to mid-November 2005. The ex-factory price of base oil
in PetroChina and Sinopec was increased by around RMB400 per ton
in January 2006 with a growth margin of 7%.
   According to the analysis made by an expert, "as the price
of lubricants in the domestic market is lower than the
international market, the recent price readjustment is only the
beginning. It will soon become synchronous with the
international oil product price. The price of base oil will be
RMB1 000 per ton higher in the first half of 2006."


Supply deficit of resources


The price rise of base oil in the domestic market is not without
reasons.
   The price of lubricants in the international market has kept
going up since 2005. The demand is brisk and there is supply
deficit of resources. The price of lubricant base oil in the
international market had another sudden increase of over US$40
per ton at the beginning of 2006.
   The amount of base oil exported by major import sources such
as Singapore, Japan, Taiwan province and Korea to China has
reduced drastically since 2006. Base oil has supply deficit in
European and American markets and their demand of base oil from
Asia is increased. The amount of Taiwan province-made base oil
exported to Europe is much higher than before. Besides, the
demand of base oil in Korea is brisk, but the output in its own
refineries has no great increase.
   According to the statistical data from the Customs General
Administration, the proportion of imported lubricants in the
apparent consumption in China was 18.2% from January to November
2005, being lower than the proportion of 21.4% in the same period
of 2004. It shows that the domestic market share of imported
lubricants decreased from January to November 2005.
   This situation doesn't change greatly in 2006. The amount of
base oil imported from Singapore in January 2006 had a drastic
reduction of 40.99% compared with the same period of 2005 and
also a drop of 7.57% from December 2005.
   The price of lubricants in the domestic market has therefore
also increased. As there is still a difference of nearly RMB1
000 per ton between the domestic market price and the
international market price, it is inevitable to make an upward
readjustment to the base oil price in order to reduce the loss
and enhance the production initiative in refineries.


Doubts on monopoly


Rumors that refineries in the two oil giants (Sinopec and
PetroChina) would stop selling base oil have also created
tension in the market. According to experts, it is a sign for
forthcoming price upward readjustment in the two oil giants and
also indicates that a new-round price rise of base oil will soon
come.
   At the 2006 Third Oil/Gas Summit Conference held in Beijing
on March 16th, a senior executive from PetroChina made
clarification on this point. "I did not hear anything about it
at the recent high-level brief meeting. If there were such a
thing I would have known something about it."
   The executive from PetroChina pointed out that in the total
profit of PetroChina gains from lubricant projects only have a
very small proportion. As PetroChina has withstood the cost
pressure without making any price rise in the oil product market,
it will not likely do anything in the price of lubricants.
   Nevertheless, such remarks are not sufficient to remove the
tension in the market. As a matter of fact, except for the binding
duties defined in purchase contracts, the two oil giants have
already suspended base oil supply to outside users.
   Manufacturers who are short of supply sources have to turn
to other channels. Low-priced base oil in Russia and Uzbekistan
has become the goods in great demand. The price has increased
remarkably and is already higher than the price of domestic base
oil with same brand and similar quality.
   Stimulated by the information about the readjustment to the
oil product pricing mechanism, oil product dealers have also
started to build up their inventory. More efforts of refineries
are therefore diverted to the supply of oil products.
   "Base oil is in short supply even within PetroChina "
disclosed a lubricant expert.
   "Part of Great Wall lubricant base oil is supplied by
refineries within Sinopec system, but refineries have
independent accounting," explained Great Wall lubricant expert
Mr. Wang. "Our cost pressure is already very large and it is
impossible