Base oils and additives, the primary building blocks of lubricants, are both in tight supply. But the two industries are moving in different directions. On the base oil side, new re?nery expansions and construction are announced monthly, and gas-to-liquid plants promise to ?ood the market with high-quality base stocks by the end of the decade. Margins between crude oil and re?ned base oil prices have approached record levels. Despite painful disruptions, described in this issue by Tom Glenn on page 40 and Tim Sullivan on page 52, the longer view is encouraging, albeit volatile.
Meanwhile, the lube additive industry, pressured relentlessly by its major oil customers to reduce costs, has shuttered more than 500,000 metric tons of capacity worth $1 billion over the past decade, I heard Afton Chemical President Warren Huang tell the Fuels & Lubes Asia Conference in Hong Kong last month. Chevron Oronites Singapore plant is the only major new facility added in the past 10 years. It, together with various suppliers de-bottlenecking, have added less than 200,000 tons of new capacity. Result: a net loss of more than 300,000 tons – some 10 to 15 percent of total additive capacity.
Is the additive industry due for another major expansion? Unlikely, Huang said. Dont expect any signi?cant new lube additive capacity for eight to 10 years, he warned, citing little or no demand growth for additives and low return on investment for additive suppliers. Low margins on engine oil additives, coupled with high research and development costs, make new investment in lubricant additives unlikely.
Dan Sheets, Lubrizol Additives vice president, sales, recently made a similar point, predicting that lube additive demand will grow less than 1 percent per year through 2012. Lubrizols engine oil additive pro?tability has declined on an indexed basis from 1995 to 2005, Sheets told the ICIS World Base Oils Conference in February.
Whats the lube industry to do? Security of supply and planning are critical, advised Huang. Contingency plans, global supply chains and operations planning are the keys, said Sheets, contending that – with planning – there is adequate additive capacity to meet demand.