SINGAPORE – The number of base oil supply sources around the world is increasing, and so is the number of merchant marketers that are in the business mainly to supply other lubricant manufacturers, an industry insider said at the ICIS Asian Base Oils & Lubricants conference here on Wednesday.
The market has moved away from the vertically integrated model of base stock production [for supplying in-house blending requirements] towards the one led by merchant marketers over the past ten years or so. This is likely to continue in the future, and the role of merchant marketers will become even more important, Anuj Kumar Singh, project manager of global consulting firm Kline & Co., told the audience. Kline classifies a merchant marketer as a base oil refiner that sells more than 50 percent of its production.
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Merchant marketers account for a large portion of capacity added to the market during the past decade, while supply primarily meant for in-house consumption has shrunk.
Total annual capacity of base oil plants supplying more than half of production for the merchant market rose from 27.4 million metric tons in 2008 to 37.4 million tons in 2018. Singh forecast an increase to 39.2 million in 2028. This includes capacity of paraffinic plants, and excludes naphthenic plants and rerefineries.
In the meantime, total annual capacity of plants used primarily for in-house blending continues to fall – from 11.8 million in 2008 to 10.4 million in 2018 – and such capacity is forecast to decrease to 8.5 million in 2028.
The growing prominence of the merchant marketers may have happened due to a variety of factors, of which proliferation in the number of independent lubricant blenders and wide range of specifications across the world are key factors, he added.
These changes mean that blenders will consider other attributes when selecting a supplier. The process of base oil supplier selection has undergone a change, with base oil quality no longer the sole determinant, he said. Other factors that blenders consider include:
- Logistics, as international oil marketers may prefer base oil suppliers with multiple production sites, widespread storage points and distribution networks as well as logistics support;
- technical support, including coverage of different additive technologies, support for reformulation, support for a wide number of formulations with minimum number of base stock grades;
- company performance and perception, with consideration given for customer friendliness, brand name, customer support and proven track records in the market; and price, which includes fair prices, price consistency, lead time, call-off periods and contract flexibility.
The supplier who performs well on these parameters is more likely to succeed in the market that is characterized by an intense level of competition, he said.
Supply and demand dynamics are changing so fast, lube blenders have plenty of options, and it is increasingly difficult for base stock suppliers to maintain and sharpen their edge based on product quality alone. Performance on other parameters helps differentiate them from their competitors and holds the key to their success, he concluded.
As regional base stock capacity like that in China continues to grow, producers from other regions have also shown greater interest in the region.
There is an increasing competition from the Middle East for their [API] Group II and Group III cargoes. [Abu Dhabi National Oil Co.] is applying for OEM approvals and as this comes through, there will be more from the Middle East [into the region] in the future, said Matthew Chong, senior editor of ICIS at the conference. He added there will be 3.4 million tons per year of capacity if all China base oil plants come on stream this year as planned.