Stephen Ames, managing director of SBA Consulting, unveiled a critical review of global lubricant demand and base oil supply at the ICIS Pan-American Base Oils & Lubricants Conference here last week, concluding that lube demand is strongly correlated to global gross domestic product, but it lags by about 3.4 percent. Based on the International Monetary Funds September projections for global GDP change, Ames forecast little to no growth in lubricants demand in coming years.
And, he added, the most recent forecasts are grim. GDP growth is likely to be lower than the IMFs September forecast.
There has been no global growth in lube demand over the past 20 years, said Ames, who is based in Pepper Pike, Ohio, but industry pundits continued to forecast increases. The pundits, and Im one of them, have tended to downplay the probability of economic downturns, they underestimated increases in lube efficiency and the impact of legislation, and most important, they ignored the relationship to GDP growth.
Several headwinds have worked against lubricant demand growth, he continued. These include economic downturns, which are likely to occur regionally or globally within any five-year forecast period.
Improvements in lube efficiency include more robust oils and extended drains – now commonly 7,500 to 15,000 miles for North American passenger cars. Experts forecast about 8 percent to 10 percent increases globally in oil drain intervals over the next five years. Thats over 2 million tons per year of lubes not needed, Ames said. Industrial oils also consume less oil per unit of output.
Legislation around the world such as fuel economy and carbon dioxide limits results in lighter vehicles and smaller engines with smaller sumps, not just for passenger cars but also for trucks and ships. Reduced government fuel subsidies, and higher fuel taxes, mean fewer miles drive, further slowing lube demand.
Focusing on the lubricants-GDP relationship, Ames noted that lubricants are an operating cost to whatever they lubricate, and consumption is a function of the level of activity and financial health of the operator or owner. As such, [lube] demand has a strong correlation to the state of the economy. GDP should be a good indicator of lubricants demand.
And it is, on a global level. GDP growth and lubricant demand growth have offset but very similar curves over the past 15 years, said Ames. Global lubricant demand has lagged GDP growth by an average of 3.4 percent. Labor productivity gains that dont use lubricants accounted for most of the gap.
Ames forecast global lube demand declining 0.4 percent in 2011 from 2010, declining 0.2 percent in 2012, and possibly leveling or rising just 0.2 percent in 2013. From 2014 to 2016, increases of 0.6 percent per year are possible, based on the IMFs brighter September GDP projections.
The relationship between GDP and lube demand also held for the largest economies (China, India, U.S., EU and Japan), but is less robust on a country-by-country basis due to cross-border lubricant imports and exports, Ames noted.
Turning to global base oil demand, Ames likewise projected no demand growth through 2016. Base oil demand of about 36 million tons is likely in 2016, little changed from pre-recession levels.
However, he said, more than9 million tons per year of new paraffinic base oil capacity and 1 million t/y of naphthenic capacity have been announced, and another 4 million t/y of new projects are under evaluation. In addition, retrofitting and debottlenecking will provide more than 2 million t/y of additional capacity.
Consequently, Ames concluded, over 9 million t/y of older or higher cost capacity should close, and this will predominantly be API Group I. However, it will take time. People are reluctant to shut down an operating asset.