Latin Americas Boom

Not until 2021 will the majority of Latin Americas vehicles need engine oils formulated with Group II and III base oils, Jorge A. Manes, Infineum Brasils Latin America industry liaison advisor, told the ICIS Pan-American Base Oils & Lubricants Conference in New York on Nov. 29.

With little growth in the traditional markets of North America, Western Europe and Japan, the worlds auto industry is increasingly looking to developing countries, Manes noted, including Latin America, where economies are growing rapidly. In fact, 2007 was the fourth consecutive year of economic growth in the region, with GDP growth averaging 5 percent, he added. Much of the rising demand for new cars is coming from Latin Americas new middle classes.

Latin Americas total vehicle population is now 61 million, or about one per 7.8 inhabitants. Brazil is the leader, with a population of 24 million vehicles, followed by Mexico with 21 million, and Argentina with 7 million. But the average vehicle age in those countries is sobering: 9.9 years in Brazil, 12 years in Mexico, 13.5 years in Argentina. It takes about 10 years for half the fleet to turn over, so when theres new [emissions] legislation, Manes said, we have to wait 10 years for demand to grow for new lubricants.

Regional trade blocs – NAFTA for Mexico and MERCOSUR (or MERCOSUL in Portuguese) for South Americas major economies – have shaped the Latin American automotive industrys footprint, Manes said. Brazil, Mexico and Argentina produce more than 95 percent of the 4.8 million vehicles manufactured in the region. In 2006, 3.7 million units were sold in the region (including imports), while 2.6 million were exported that year.

Auto Movers

Brazil is the regions single largest vehicle market, accounting for 45 percent of total regional vehicle sales, followed by Mexico with 32 percent, and Argentina with 9 percent, said Manes, who is based in Rio de Janeiro. Twenty-five automotive companies assemble vehicles in Brazil, producing 2.5 million vehicles in 2006. They are supported by 500 auto parts companies. 2006 was Brazils best year, Manes said. Internal [vehicle] sales went up 4.4 percent, and exports were up 3.1 percent.

Special factors in Brazil include dominance of the one-liter engine, and the countrys leadership in ethanol fuels. Flex-fuel cars, which can use fuels containing 25 percent to 100 percent ethanol, accounted for 74 percent of sales in 2006.

Fiat held the top spot in Brazils passenger car market in 2006, Manes said, with 28 percent. It is followed by General Motors (25 percent), Volkswagen (24 percent), Ford (8 percent), PSA Peugeot Citroen (5 percent), and others (10 percent). Fiat likewise leads in light-commercial unit sales, with 25 percent of the market, followed by Ford (23 percent), GM (14 percent) VW (16 percent), Toyota (10 percent), and others (12 percent).

Argentina has 10 companies with total capacity to assemble 500,000 vehicles annually, plus about 170 auto parts companies. It ranks 22nd worldwide in vehicle production, Manes said. Argentina has recovered from its 2002 crisis, and local sales growth is pushing [vehicle] manufacturing, said Manes.

Even further along is Mexico. Its home to 11 companies that assemble vehicles, with capacity to produce about 2 million vehicles a year, and 1,000 auto parts companies, Manes said. Mexico ranks 10th worldwide in vehicle production, GM leads in both vehicles manufactured and sold there. Mexico exports more than 70 percent of its production, primarily to North America.

Inside Mexico

An even closer look at Mexico was offered by Victor Franco-Paredes, operations manager of Mexico City-based independent blender Comercial Roshfrans. Mexicos 850,000 metric ton lubricants market is characterized by a high level of competence but too many competitors, he observed, and the strong influence of both North American and European automakers is prompting demand for higher-quality engine oils. Still, upgrading lubricant quality is a challenge because older, high-mileage vehicles dominate the fleet.

Accurate information is difficult to obtain, Franco-Paredes told the ICIS attendees, saying he had interviewed numerous experts to collect the data he shared. For example, estimates of Mexicos total finished lubricants market ranged from 600,000 to 900,000 metric tons per year; he pegged the total at 850,000 mt/y.

There are around 200 brands of finished lubricants, but only between 25 percent and 40 percent meet international quality standards, he said. The largest market share is associated with lower-price lubricants.

Mexicos market, Franco-Paredes said, offers both opportunities and challenges. With the worlds 13th largest economy, Mexican gross domestic product is expected to grow 3.5 percent in 2008. National oil company Petroleos Mexicanos, or Pemex, will revamp its fuel refineries over the next two to three years, to begin producing ultra-low-sulfur diesel fuels, which will prompt upgrades in the heavy-duty lubricants market. And Mexico will receive direct investment of U.S. $2.2 billion from 2008 to 2011 from Toyota, Hyundai, Chrysler, GM and Ford, to manufacture 17 different models of new vehicles, again pushing demand for high-end lubricants.

But challenges persist, Franco-Paredes noted. Seventy-five percent of all gasoline-powered vehicles have logged over 75,000 miles, and their number is actually growing. Because used cars over 10 years old imported from the United States are exempt from import taxes, old-car imports have increased from 800,000 in 2005 to an estimated 1.8 million in 2007, frustrating efforts to improve sales of higher-tier engine oils. A large portion of the lubricant market turned into commodities, where price is the key differentiation, Franco-Paredes said.

Not least, he said, political and economic stability are a requirement and a challenge for the country.

Finished Lubes

Roughly three-quarters of Mexicos demand for finished lubes is satisfied with products blended and/or packaged in Mexico, said Franco-Paredes. The remainder are imported lubricants, supplied by more than 2,100 companies – although just 20 companies provide 90 percent of the imported lubes. And the United States is the overwhelming country of origin for finished lubricants imported into Mexico.

Focusing on the automotive lubricants market, Franco-Paredes said about 2 million passenger cars are produced in Mexico annually, with about 40 percent of those exported, mainly to the United States. Nissan and GM are the leading suppliers of vehicles to the Mexican market.

API SM engine oils make up only about 6 percent of the higher-tier passenger car oil market, said Franco-Paredes. SL accounts for 63 percent, SJ for 10 percent and SF for 21 percent.

By channel, 38 percent of passenger car motor oil by volume is sold in small mechanics shops that are found everywhere in Mexico, said Franco-Paredes. Twenty percent is sold direct to larger fleet customers; 15 percent is automakers own brands; 15 percent is sold through quick lubes; and 6 percent each is sold at gasoline stations and at retail supermarkets.

On the heavy-duty side, nine companies are vying in Mexicos truck and bus market, Franco-Paredes continued. Mercedes Benz/Detroit Diesel is the leader, followed by International, Kenworth, Ford, GM, VW, Volvo, Scania and Man. An estimated 90,000 commercial vehicles are produced annually.

API CF heavy-duty oils have about 75 percent of the higher-tier diesel engine oil market. CD has 7 percent, CH has 7 percent, CI has 9 percent, and CJ has nearly 2 percent.

Fueling Change

The heavy-duty market will be seeing some changes soon, as tighter emissions standards take effect. Looking at diesel fuel standards, Franco-Paredes noted that 500 parts per million of sulfur is the current limit for much of Mexico, with a 300 ppm limit in certain metropolitan areas. Fifteen ppm-sulfur diesel is already available at the northern border, he added.

In September 2009 the requirement will be 15 ppm maximum throughout Mexico. Were not going to meet this deadline, Franco-Paredes conceded, but were working toward it.

Similar efforts to reduce automotive emissions are seen everywhere in Latin America, as Infineums Manes had pointed out. Many of the regions countries have adopted European or U.S. emissions standards. Argentina will require Euro-IV compliance for new models beginning in 2009, and in Brazil, Proconve emissions standards similar to Euro IV go into effect that same year. And in Mexico, Euro IV-level standards are effective in July.

These and other emissions standards will require a move to low-sulfur fuels, but there is a heated debate as we get closer to the 2009 phase in, Manes acknowledged, because of the large refinery investments required to comply. It isnt clear how much low-sulfur fuel will be available, he noted, presenting a challenge to automakers.

Base Stock Issues

Manes also noted that low quality dominates in both the heavy-duty and passenger car finished lubricant markets. However, there are two big lubricant issues for Latin Americas base oil suppliers: fuel economy and sludge issues.

The auto industrys need to help improve fuel economy has resulted in introduction of lower-viscosity lubricants. Several engine manufacturers are now using 5W-30 oils as their factory fill, Manes said. The regions severe operating conditions contribute to sludge issues, as does fuel with sludge precursors. This presents a particular problem for the small one-liter engines common in Brazil.

Overall, Latin Americas auto industry is poised for more growth, Manes concluded. And future lubricant needs will encourage the growing use of Group II and III base stocks throughout the region, he said.

William Downey of Kline & Co. agreed. He told the ICIS meeting to expect some Group III demand to begin appearing in Latin America after 2010. However, there are barriers – both physical ones and tariffs – that may keep Group III out of reach. We see the real requirement there to be Group I and II, the Little Falls, N.J.-based consultant added.

So far, Latin America is coping fine without Group II and III stocks, Downey observed. Group I is still a very large part of global demand, he said, and its still growing in Latin America. The region produces only Group I base oils in fact, save some napthenic output in Brazil and Curacao. And its Group I demand already is more than the regions own base oil producers can meet. Latin America is at present in a deficit for base stocks, he emphasized.

The deficit is larger than any one supplier in the region makes, he continued, pointing out that the average base stock refinerys capacity in Latin America is less than 5,000 barrels per day. The only large one is Petrobras Duque de Caixas plant in Brazil (12,000 b/d). But thanks to booming demand, Latin America will need to tap at least another 18,000 barrels per day of base oil refining capacity by 2020 – either building it or importing it from elsewhere, Downey said.

There had been hope for more base oil from Mexico, where Pemexs Salamanca plant produced about 5,200 b/d of API Group I stocks in 2006, pointed out Roshfrans Franco-Paredes. Two years ago Pemex talked about a Group II plant using Chevron technology, he noted, but with [Mexicos] new government, it has been delayed. There has been no recent news about any Pemex base oil upgrade or expansion, although the countrys thirst for higher-quality base oils will grow.