Group II/II+ base oil supply and demand are projected to move more or less in tandem. Increasing Group II supply increases availability, and this drives substitution into Group I applications. As demand growth is primarily driven by substitution, this market is expected to be in surplus through 2020, she said.

Global Group III/III+ base oil supply will grow by more than 130 percent in the next ten years. The top four suppliers will account for almost 80 percent of global supply. Greater concentration of base oil supply results in more product and formulation uniformity. This may lead to faster adoption of Group III-based formulations by the market place, Agashe observed. South Koreans SK and S-Oil, Anglo-Dutch Shell and Neste from Finland are the top four Group III base oil suppliers, according to Kline.

The future of the global lubricants industry lies in the Asia-Pacific region, Agashe continued. Around 42 percent of global lubricants were consumed in this region in 2010, while North America is second, accounting for 27 percent of global demand. Europe consumed 15 percent, Africa and the Middle East consumed 8 percent and South America around 7 percent.

The largest market in terms of lubricants volume consumed continues to be the U.S., though a question remains for how long, Agashe said. In 2010 U.S. was the leading consumer in the world, accounting for about 22 percent of the global lubricants, followed by China with around 18 percent of the global lubricants consumed, she said, adding that only five years ago China was a lot smaller lubricants consumer then the U.S. We expect China to overtake the U.S. in the coming years in terms of lubricants demand.

Global base stock demand in 2010 was 640,000 b/d. Although we have seen a lot of capacity shut downs, Group I is still the primary base stock in the world, accounting for almost 60 percent of the total global base oil demand, said Agashe. It is followed by Group II which accounts for about 21 percent of the global demand, followed by Group III (7 percent), Group II+ (3 percent), Group IV (2 percent). Naphthenics accounted for 9 percent of the global base oil demand in 2010.

Base stocks demand is driven by a complex web of interconnected drivers, Agashe said. Countries like India or China are not following the same evolution of the lubricants market that took place in Europe or U.S, she noted. They are leapfrogging in technology, and very soon many of the OEMs are going to establish global specifications. The motor oil used in the U.S. will be the same oil recommended for a car assembled or driven in countries like China and India.

Kline estimated global base stocks supply in 2010 to be almost 700,000 barrels per day. However, actual supply in 2010 was most likely lower due to unplanned outages not accounted in supply buildup and changes in production yields due to changes in feedstock and product slates, Agashe said.

Group I accounted for 395,000 b/d, or 57 percent of the total global supply in 2010, the production of Group II/II+ accounted for 183,000 b/d, or 26% of the total. Group III accounted for 58,000 b/d or 8% of the total supply.The supply of Group I is in decline due to plant closures in North America and Europe, while the supply of Group II/II+ is concentrated in North America and Asia-Pacific regions. Group III supply is largely concentrated in the Asia-Pacific region.

We expect Group I base oil supply to shrink to about 37 percent of the total global supply by 2020, said Agashe, while we expect a significant increase in Group II/II+ and Group III supply.

A number of Group I plants are under threat of closure in the future, owing to various factors, including limited interest among new owners for the base stocks business, Agashe said. AGIPs, was put on sale in 2009, but no buyer was found. In the current economic situation, it may be difficult for Italys oil major to shut down and create unemployment. Also, given the internal need, it may continue operating.

Another candidate for closure is Imperial Oils plant in, Vancouver, Canada. After the closure of Imperial Oil Sarnia which also produced Group II, this is a candidate for closure, given the small size, Agashe noted. Group I plants which continue operating depend onthe business situation of each individual plant, the plant owners business strategy, and the fit between the two.

Product and regional supply-demand imbalances drive substitution and trade, and impact base oil prices. Group I market is tight in deficit. And as a result there is significant tightness in the market for bright stocks and some of the heavier viscosity grades. Group II/III markets are in surplus causing Group II/III substitution in Group I applications. Similarly, North America and Europe are in surplus, and export to other regions, Agashe said.

Regional supply-demand imbalances drive trade and make the industry global. Base stocks are often made where they are not consumed or needed. Group III is made in Asia and Group I in Europe. Group I surpluses from Europe flow to South Asia, South America, Middle East and Africa, and from Russia to China. What we see is a lot of movement of base stocks these days that we didnt see in the past. This is taking place because the base oils are produced in the parts of the world where they are not truly needed.

Technical obsolescence, growing Group II/III supply, and aggressive substitution in Group I applications are drivers behind Group I demand reduction, Agashe concluded, adding that the Group II market is expanding with an increasing number of producers, many of them producing for in-house requirements.