Kline estimated potential lubricant base stock supply in 2012 – including API Group I, II/II+, III/III+ and naphthenic – at about 38.2 million metric tons. Group I capacity still accounted for just over half of that total in 2012, with Group II/II+ accounting for slightly more than a quarter, with Group III/III+ and naphthenic accounting for the remainder.

Currently the market is experiencing a surplus in Group II and Group III base stocks, he noted, with supply playing a greater role than technical considerations in determining which category of base stock to use in various applications. He noted the market is witnessing a shift away from historical patterns where the supply of high-performance base stocks was tied with demand, which was mostly in-house.

The emerging scenario is one where the supply of high-performance base stock is far in excess of technical demand, and much of it is merchant [market], Kumar said. We will witness more penetration of these high-performance base stocks even in those applications where there is no such technical demand.

Group I/Bright Stock
Group I still accounts for more than half of the production, though its share has decreased continuously in recent years. Kline expects that trend to persist. Group I demand will continue to decline as it becomes obsolete to blend lubricants conforming to newer standards, Kumar said.

The global bright stock market was balanced in 2012, with total demand of about 2.7 million tons, Kline found. The situation differed from region to region, Kumar pointed out. Europe, the largest producer of Group I base stocks, produced more bright stock that its demand and hence was a net exporter, he pointed out. On the other hand, the Asia-Pacific region had a significant deficit for bright stock and required imports to meet demand.

The use of bright stock is widespread in applications that require medium- to high-viscosity lubricants, Kumar said. The percentages and applications for bright stock in lubricant formulations are highly inconsistent by region, largely due to the differences in engine oil requirements, as well as the number of specialty applications in established versus developing markets.

Over a period of time, the rationalization of older and less efficient Group I base stock plants has caused a decline in bright stock supplies. Kumar noted that the bright stock market witnessed a significant deficit in 2010, which resulted in prices shooting up. As a result, the blenders were forced to explore substitutes to keep their formulations economical, he said. Going forward, bright stock use in automotive oils will decline as multigrade engine oils replace monogrades, and viscosity shifts lighter with emissions and fuel economy requirements.

Kumar noted that Group I base oil is still a key base stock for formulation of automotive lubricants in markets like Asia-Pacific, South America, Eastern Europe, Africa and the Middle East.

Industrial segments remain mainstay applications for Group I base stocks; however, it is continuously being challenged by Group II in applications like turbine oils, hydraulic fluids, gear oils and railroad oils, he added.

Group II
Group II/II+ demand is expected to grow at about 4 percent annually through 2017.

Over the last 10 years, he noted, Group II has replaced much of the Group I used in consumer automotive formulations, particularly passenger car motor oils, heavy-duty motor oils and transmission fluids. A large portion of this displacement is attributed to stringent emission and fuel economy norms, Kumar pointed out. Group II is significantly used to blend HDMO and PCMO grades, like 10W-40 and 10W-30. Group II also has established a substantial presence in some of the industrial lubricants.

He noted that, due to oversupply of Group II, its prices have headed southwards, making its price competitive in comparison to Group I. Moreover, the logistic and historic cost benefits in using a single base stock increasingly make Group II a preferred choice among blenders.

Kumar noted South America currently appears to be following the North American blend approach, focusing on Group II base stocks rather than Group III. This is actually reflected in Petrobras plan to set up a new Group II plant in Brazil. Moreover, abundant Group II supply from U.S. will help them pursue this approach.

Group III
Kline expects Group III demand to grow faster than any other base stock category – at an average annual rate of more than 10 percent through 2017. Much of that growth will be driven supply push rather than by technical considerations.

With new categories like PC-11 and GF-6 in offing, use of Group III will increase in engine oil formulation, he said. HDMO, which currently uses Group II mainly, will make greater use of Group III in formulations.

To date, Group III base stocks have found little use in industrial applications. High prices and lack of technical demand have ruled them out except for select applications like compressor oils and gear oils for wind turbines.

In Klines view, the growing supply of high-performance base stocks in Middle East will partly be directed towards South Asian markets and Africa and the Middle East, after they have supplied the U.S. and European markets. New Group III supply in the Middle East will represent a challenge for Asian Group III suppliers, as it is expected that a greater portion of Asian Group III production in the future will remain in [Asia].

Klines three reports are Global Lubricants Basestocks: Market Analysis and Assessment, Global Synthetic Lubricants Basestocks: Market Analysis and Assessment, and The Global Business Outlook for Brightstocks.