LONDON – New emission standards and engine oil specifications are boosting demand for premium lubricant grades, while electric vehicles adoption is suppressing demand for conventional engine oils – all of which impacts production of API Group I, II and III base oils, an Argus Media analyst said recently.
Global base oil demand, which recovered from the pandemic slump of 2020, is projected to plateau at 30 million metric tons per year by 2030, Guo Harn Hong told the Argus Global Base Oils conference here Feb. 20.
“The drop in Group I demand is smaller than the drop in Group I supply, leading to a reduction in Group I capacities globally,” Hong said.
More than 5 million t/y of Group I production was taken offline, while about 20 million t/y of Group II and Group III capacity were added since 2011, the firm said.
The largest Group I production capacity reductions were the closure of a 510,000 t/y plant ExxonMobil plant in the United States in 2016 and the shutdown of a 380,000 t/y Shell plant in Singapore in 2021. Eni recently announced the pending closure of the largest Group I capacity in Europe – its 600,000 t/y plant in Livorno, Italy. Meanwhile, Shell announced plans to convert its Wesseling fuel refinery in Germany to produce Group III base oils.
Currently, the global nameplate base oil capacity is approximately 60 million t/y, according to Argus.
“Although global base oil demand is expected to remain at the 30 million t/y mark, we can confidently say that we operate in a structurally oversupplied market,” Hong said.
More than 20 million t/y of Group II and Group III capacities have been added since 2011, he added. Many of these new capacities are prominent Asian expansions. According to Argus, most of them are in China, such as Sinopec’s 250,000 t/y plant in Nanjing, Shandong’s 620,000 t/y facility, or Hongrun Petrochemical’s 500,000 t/y.
The most significant expansions currently underway include ExxonMobil’s 1 million t/y plant in Singapore scheduled to open by 2025, and Luberef’s plant in Yanbu, Saudi Arabia, with capacity of 275,000 t/y scheduled to stream in 2026.
“Globally, the volume of new plants clearly outweighs the volume of plant closures,” Hong stressed.
He also noted that in China, more than 5 million t/y of Group II and Group III capacities came online since 2011, and most of these plants are not operating at maximum rates.
“China had been a net importer of base oils,” he said after his presentation. “But rising domestic production will reduce the region’s reliance on imports and could position China to be a net exporter in the future.”
In 2023, Argus found that Group I constituted 38% of global base oil production capacity, slightly less than Group II which accounted for 41%. The remainder went to Group III, which held a 21% share of global production capacity.
Regionally, according to Argus, Group II dominated in Americas with 57% of capacity in 2023, followed by Group I at 38% and Group III with 4%. Europe was dominated by Group I capacities, which last year held 70% of the total capacity on the continent, followed by Group II with 17% and Group III at 13%. Group II capacities also dominate in Asia, with a 50% share of the total, followed by Group III at 28% and Group I with 22%. The Middle East Gulf region is dominated by Group III capacities, which last year held 41% of the total, followed by Group I at 36% and Group II with 23%.
In Europe, Hong said, regional base oil flows are disrupted by logistical complications such as the Red Sea rocket and drone attacks from Yemen, which are slowing Group II and Group III imports. Markets are hopeful for a rate cut by the European Central Bank, but weaker margins could prompt run cuts.
On the negative side, the euro is staying weak against the U.S. dollar amid weak Eurozone manufacturing purchasing managers index, while demand is muted in Africa, Turkey and the Middle East.
North America expects a positive year, with the spring oil change season boosting demand. The U.S. Federal Reserve has signaled the end of rate hikes and announced cuts are likely in 2024. Lower additive costs have boosted margins. “On the flip side, finished lubricant inventories are ample, refinery run rates are rising year on year, and congestion in the Panama and Suez canals limits outlets for the United States Gulf Coast refiners,” Hong added.
He added that structural base oil shortages in Latin America and Africa could boost the attractiveness of these markets.
Global lubricant demand is expected to grow marginally and steadily from around 38 million tons per year in 2024, plateauing at about 40 million t/y by 2030 as the share of electric vehicles increases, according to Argus.
“Lubricant demand very much depends on the adoption of electric vehicles, which at the moment represent a tiny fraction of the global vehicle fleet,” Hong said.
However, industry sources estimate that electric vehicles could increase from about 1.8% of the entire global fleet, or about 30 million units in 2022, to about 10% to 14%, or 240 to 250 million units, by 2030. “In this scenario we should expect weaker demand of conventional engine oil,” Hong said. “This demand reduction would be offset by the appearance of new lubricant formulations that prevent corrosion, dissipate heat around batteries and electric motors, and aid in regenerative braking.”