In terms of supply and demand balance, the Group I market was tightly balanced, Phadke said. On the other hand, the Group II, II+ and III markets had significant surplus. In terms of regions, North America, Western Europe and Asia are all in significant surplus with Group II, Group I and Group III base stocks, respectively.

Group I
Both supply and demand of API Group I base stocks have steadily declined over the last 10 years, he pointed out, adding that this is primarily due to the technical obstacles of Group I base stocks for automotive applications.

Today the size of the Group I market is about 64 percent of the total base stocks market, Phadke continued. Group I base stocks can no longer be used in most passenger car motor oils and heavy duty motor oil applications, due to the high sulfur content, as well as due to the fact they have high volatility. Most modern PCMO and HDMO products require at least Group II, if not Group III quality base stocks, as they require low sulfur, better oxidation stability and better low temperature properties.

He related how that has expanded demand for Group II and III base stocks significantly. At the same time, the supply of Group II and Group III base stocks has almost exploded in the last 10 years – the supply of these high performance base stocks has always been in excess of demand, Phadke remarked. That surplus had led to a substitution push to use high performance base stocks in applications where there is no technical need for such a product, he added. The substitution also increases the pressure on Group I base oil plants to rationalize.

Phadke noted that many experts expect a significant reduction in Group I, especially in Western Europe. Europe has a significant Group I surplus, and this surplus is growing as the overall demand declines and formulations move away from Group I, he continued. Also, Group I exports from Europe are getting more and more difficult due to the growth of Group II and Group III supply in the target export markets. Currently Europe has not allowed the use of aromatic extracts, which is a byproduct from Group I manufacturing. As a result, there are now problems associated with disposal of this material.

Europe is also promoting rerefining over burning of used oils. The rerefined base stocks compete in the same market space as Group I, Phadke pointed out.

Due to all of these factors, we see the greatest hope for Group I supply reduction [to occur] in Europe, he said. A lot of plants are up for sale, and we believe that many of them may end up being shut down. In other parts of the world, Group I supply reductions can occur, for example, in North America. Asia would also see some reduction in Group I supply, but this would mainly be due to upgrade of Group I plants to Group II rather than due to shutdowns.

Kline also sees growth in niche players entering the Group I market, with more interest in specialty products like process oils and waxes, rather than base oils. The company also sees Group I becoming increasingly a niche product for metalworking fluids, process oils and bright stock applications.

Group II
Phadke said the emerging Group II supply looks a lot like Group I used to. We see a large number of plants, many of them producing for in-house consumption, he observed. There are also a handful of large-scale merchant plants which are supplying all parts of the world. So this is somewhat like Group I supply of yesteryear.

Kline believes that widespread availability of Group II would spur substitution into Group I applications areas, and would increase the market for Group II base stocks.

Group II demand will grow first by replacing Group I in automotive applications in Asia, South America, and other parts of the world, Phadke said, and by displacing Group I in select industrial applications.

He noted that while many Group II suppliers are experimenting with supplying their product into turbine oils, hydraulic fluids, and other applications such as marine oils, only time will tell which of these will be successful. So in a sense Group II can be thought of as the new Group I, in terms of near universal use as well as widespread availability, Phadke added.

Group III
Klines projections suggest Group III demand could almost double in the next 10 years, based on the current trend of PCMO shifting to 5W grades. Phadke pointed out the supply growth would still remain stronger than the demand growth.

The top four Group III suppliers will account for over 80 to 85 percent of the global Group III supply, Phadke said. Whats interesting is that three of these four suppliers do not have a presence in the finished lubricants business. The Group III that would come to the merchant market would be more standardized, more uniform, and this would in turn aid its use.

The key driver for Group III demand growth would be the growth in PCMO 0W and 5W grades. North America has already transitioned from 10W grades to 5W grades and may eventually transition to 0W grades, Phadke stated. What is interesting is that Asian countries like China and India have 5W grades – they have simply jumped a generation, going from using 15W grades to 5W grades. Over time, we feel the use of 5W grades in this market would expand significantly.

For more information on the study, visit www.klinegroup.com/reports/y618series.asp.