OSTFILDERN, Germany – European lubricant blenders have long benefited from the regions surplus of base oils. Not only has the excess supply made Europe a net exporter that helps meet base oil needs in other regions, it also has helped tamp down prices within Europe.
But that luxury is fading and will likely cease to exist in the future, according to Stephan Baumgaertel, executive director of the German Lubricant Manufacturers Association, who spoke Jan. 11 at the International Colloquium on Tribology, held here at the Technische Akademie Esslingen.
Baumgaertel said capacity for API Group I oils will continue to decrease and that new sources of more highly refined stocks are unlikely to replace what is lost. The result, he said, will be a fundamental decrease in availability of base stocks for the region. We expect base oil prices to increase in the future, he said.
According to Baumgaertel, global base oil supply decreased slightly between 2008 and 2010, led by reductions in Europe, which in years past had a larger surplus than any other region. Capacity in Western Europe fell approximately 800,000 metric tons per year during that period, while Eastern Europes capacity dropped by 1,500 tons per year.
Base oil availability in Europe tightened significantly during that period, and prices underwent steep increases. Unfortunately for blenders, Baumgaertel said, several factors work against the building of new capacity. Petroleum reserves are sufficient to ensure continuing supply of crude oil – the start of the supply chain for most base oils – at least until the middle of this century.
But there are two problems. First, reserves are becoming more and more difficult to tap, which raises prices for crude and other products down the supply chain, including base stocks. Secondly, global crude supply is shifting to crudes that are lower in viscosity, higher in sulfur, lower in waxiness – all of which makes feedstocks that are less conducive to base oil production.
Growing demand for fuel is another factor inhibiting creation of base oil capacity. Global base oil capacity has undergone large shifts from Group I to Group II and Group III production. Group II and III plants have more flexibility in the types of feedstocks they can use to make base stocks. However, unlike Group I plants, they also have flexibility to shift production between base stocks and certain types of fuel, including diesel and jet fuels, both of which are in high demand. Base stocks carry better margins than fuels, but they are also more complicated both to produce and to sell.
Diesel and jet fuel are by far easier to sell, and demand [for them] is increasing strongly, Baumgaertel said. When this happens, refiners have less incentive to make base oils.
Baumgaertel acknowledged that a slew of new Group II and III plants have come on-stream the past few years or are slated to start up in the near future – mostly in Asia. Operators of many of these plants have said that they plan to market portions of their output in Europe.
Baumgaertel predicted, however, that oils from these plants will end up staying in the regions where they are produced, or that amounts exported to Europe will not keep pace with capacity losses in that region.
It is very likely that there will not be new capacities available for the European market, he said.
At the very least, he suggested, the volume of base oils – including imports – that are available to Europe in the future will constitute less of a surplus than the region has enjoyed in the past. That fact alone would tend to increase prices.