The automotive industry has long been driven by legislation. First, there was a focus on safety and quality. Then, as the automotive fleet grew, governments became concerned about atmospheric pollutants – particularly with regard to urban air quality. More recently, concern has grown over carbon dioxide and other greenhouse gas emissions as we understand more about the potential consequences of global warming.
These measures occurred in the mature and most advanced markets first and spread from there. Recent years have seen legislative measures increasingly being imposed on the automotive industry in developing markets. This is a consequence of the globalization of the automotive industry and also of the widespread acceptance that global emissions reduction is a necessity.
The automotive industrys response to legislation has always been to comply with requirements at the lowest practical cost. This is simply a reaction to competitive pressures in a tough industry and a recognition that consumers mainly buy on price, not environmental performance.
New hardware development is expensive, while fluid solutions are often seen as relatively cheap and maybe even someone elses costs. A feature of the last couple of decades has been that original equipment manufacturers have sought to reduce their costs by reducing the number of vehicle platforms, and they have increasingly deployed these platforms globally. Vehicle and hardware builders have also reduced their costs through development partnerships and alliances and by outsourcing systems and components to their suppliers.
Impact on Lubricants
When the three-way catalyst was developed, it greatly reduced tailpipe emissions of oxides of nitrogen, hydrocarbons and carbon monoxide. But widespread deployment required the elimination of lead from gasoline and placed constraints on the phosphorus content of lubricants. Phosphorus reduction was a low-cost solution for OEMs and was greatly preferred to increasing very expensive catalyst loadings in emissions control systems.
Diesel particulate filters were enabled by the introduction of low-sulfur diesel, a refining cost, as was lead reduction. But their use also resulted in pressure to reduce ash, sulfur and phosphorus in the lubricant. Again, this was seen as a low-cost alternative to increasing the size of the already expensive particulate filter. All of these moves are consistent with the automotive industrys dogma of lowest practical cost to comply.
In the drive to improve fuel economy and reduce associated CO2 and greenhouse gas emissions, many hardware options are available, but they all have significant implementation costs. On the other hand, the incremental gains from lubricant-derived fuel economy may be of a lower order but are seen by the automotive industry as relatively cheap to implement and highly cost effective.
Presently, two API categories are in development for light- and heavy-duty vehicles. The GF-6 category has been split, and a new fuel economy grade is coming that will allow substantially lower viscosity oils to be deployed, utilizing the new 0W-16 grade, and potentially even thinner viscosity grades. A similar situation is developing with PC-11B, a new heavy-duty fuel economy grade that will allow deployment of lower viscosity oils within the new categories without compromising other aspects of performance.
Historically, new API specifications have been taken up quickly by the market. What is uncertain in these cases is just how fast the uptake will be.
Outside the API segments, Japanese automakers are in the forefront in the drive to adopt advanced fuel economy oils, and they are planning to demand even lower viscosities. Light-duty 0W-16 and 0W-8 oils are now being used in Japan, and 0W-20s are well established elsewhere. In Europe, both ACEA and the most advanced OEM specifications are expected to follow the same low-viscosity, high fuel economy trend.
For heavy duty oils, lighter viscosities are already well established in Europe, and the first commercially available 0W-20 heavy-duty oil has emerged. The message is inescapable: Low-viscosity, fuel economy oils are coming and the advance will be irreversible, because the benefits are just too attractive for OEMs. The only uncertainty is just how quickly it will happen.
Impact on Lubricant Marketers
Global giants are investing in megabrands through advertising, sponsorship and increasingly closer ties to OEMs. They recognize that associating their brands with the most advanced hardware is the way forward, and they look to get leverage from their collaborations into the attractive OEM franchise networks.
Global deployment of advanced hardware means global need for advanced lubricants. Development investment is high, the competition is fierce, but the rewards can also be very high.
In addition, ambitious regional marketers are now looking to build on their home market success by expanding into other regions. These new competitors are often fully integrated and have shown a willingness to grow their business through both capital investment and acquisition. They have also realized that to build their brands they have to invest in advertising, sponsorship and OEM collaborations. In effect, they are learning from the global giants and intend to compete with them globally.
The net result is heavy investment in global brands by both established giants and ambitious newcomers. Also, high-technology fluids are moving from top-tier and premium segments into the mainstream as marketers compete for a technological edge to meet increasingly sophisticated OEM demands.
The competition will be fought out in developing markets because that is where nearly all the future growth will be. Therefore, regional strength as well as global capability will be important. In short, more competitors will be chasing market share, and the competition will be ferocious. Both consumer recognition and strong automotive industry linkages will be essential for success; thus, significant investments in both OEM collaboration and brand promotion will be required.
The consequences for base oils are clear. The move to thinner oils will be irreversible as OEMs seek to squeeze out the most fuel economy benefits. The new grades will likely penetrate the market faster because of the rapid global deployment of advanced hardware and competing marketers seek to deliver OEM needs.
The absolute rate and pace will be determined by continuing legislative pressures as the base driver. But they also will be affected by competition among marketers and, of course, general economic conditions.
The chart illustrates the impact of moving to lower viscosities based on a simple set of API Group III oils. As viscosity drops, the demand for lighter cuts increases rapidly. This means opportunities not only for Group III and III+, but also potentially for polyalphaolefins and other Group IV and V specialty fluids.
Impact on Base Oils
Base oil producers are at the tail end of the process, and they have to produce what the market needs. As lower viscosity oils are adopted, producers will have to satisfy increased demand for lower cuts. Group II may become the new Group I, and marketers will be able to move to Group II or even Group III at little or no cost premium, simultaneously simplifying their product slate and inventory.
Most commentators see oversupply in all three API groups for the foreseeable future, but there could be competition for some base oil cuts to make the most advanced fluids. And life for Group I suppliers will likely become increasingly difficult.
It is not all bad news because Group I base oils retain some advantages for many industrial, specialty and process oils. And demand for bright stock for marine lubricants will continue. But it will be hard to justify further Group I investment compared to the prospects for Group II or III.
In general, overall refinery economics, flexibility and integration favor Group II investments, while the highest lubricant performance requirements may well justify further investment in Group III and particularly Group III+. There may also be some potential for PAO and niche fluids as OEMs drive down the viscosity curve.
Sunny Days or Tough Times?
Experience shows that the only certainty in predicting the future is that you will be wrong, and the best approach is having a broad understanding of possibilities and flexible plans. Space allows a look at only two equally plausible and extreme scenarios: Sunny Days as a positive scenario and Tough Times as a more negative outlook.
Sunny Days: Nearly everyone is happy, world trade flourishes, China and the rising economies maintain historic growth, oil prices rebound to higher levels and political tension is low. Both mature and rising markets are attractive for lubricant marketers, and the automotive industry invests heavily in new technologies that require close collaboration with lubricant marketers to yield maximum system synergies. Lubricant markets are highly competitive but also enjoy healthy margins.
This scenario envisions rapid penetration of lower viscosity oils in all major markets. Expect greatly increased uptake of Group III/III+, IV and V cuts as marketers compete on performance and services. Less developed markets upgrade quality, with Group II increasingly replacing Group I to deliver better performance at the same cost. Demand for diesel is also heavy in a flourishing world economy.
Consequences will be further Group I rationalizations, increased investment by Group II and III producers, with Group IV and V producers competing for top-tier and premium opportunities. The major impact on base oil would be significantly increased flows of Group II into historic Group I markets as quality and performance are upgraded at essentially no extra cost. The most sophisticated markets increase their use of Group III/III+ as high fuel economy/low-viscosity oils penetrate the markets.
Tough Times: The world slows down, China and the rising economies falter, there is potential for world recession, political tensions rise and protectionism increases as nations move into survival mode. Oil prices will remain low, with oversupply and refinery closures. The automotive industry will have gross over-capacity and will rationalize, and there will be serious competition in the lubricant market.
Consequences for base oils will be slower conversion to high-performance, fuel economy grades and limited quality upgrades in less-developed markets. The automotive industry will focus on economies of scale but, crucially, will still look to maximize lubricant fuel economy benefits.
There will be substantially reduced profitability for lubricant marketers, intense pressure on margins and consequent pressure on base oil producers margins. Whats more, there will be gross oversupply of all base oil groups. So Group I producers will be heavily disadvantaged on cost, and Group II will penetrate historic Group I markets.
As a result, Group I plants will close, and there will be little pressure on 4-centiStoke Group III/III+ supply. Opportunities for PAO and Group IV/V producers also will be reduced, and, of course, there will be little justification across the board for further base oil capacity investment. Group II/III flows will continue to developed and sophisticated markets, perhaps limited by some trade protectionism.
The two scenarios are not all that different. They share a number of common features. The auto industry will be driven by lowest practical cost to comply, whatever the circumstances. Therefore, it will continue the global rollout of advanced technology and will continue to seek lubricant fuel economy benefits. Marketers will want to stay close to OEMs, and intense competition in either scenario will drive costs down.
It is hard to develop alternative plausible scenarios where these common elements do not apply. Therefore, the industry can plan accordingly to take advantage of these likelihoods. These or other scenarios can be used to identify signposts that show which way the industry is heading.
In Conclusion
The future is not all about refining numbers and global economics, but also about understanding the general dynamics of the lubrication industry. Therefore, the automotive industry will continue to drive lubrication needs as it seeks to comply with legislation at lowest practical cost, and continues to focus on improved fuel economy and reduced greenhouse gas emissions.
The situation for lubricant marketers will be highly competitive as they focus on developing consumer brand value and delivering performance, services and reduced costs to OEMs. Base oil producers will adapt to delivering market needs in a world where production flexibility may be important for success and where the future for Group I producers looks increasingly problematic.