Five to six million tons per year of API Group I base oils will be shut down or upgraded, resulting in a significant bright stock deficit by 2022, with no price-competitive substitutes in sight, Kline & Co. advises.
Geeta Agashe, Klines senior vice president for energy, gave a fresh analysis of Group I supply and demand at the ICIS Middle Eastern Base Oils & Lubricants Conference in Dubai in October. The lubricant industry, she said, faces an increasing shortage of heavy neutrals and bright stocks and oversupply of light viscosity grades.
Global lubricant demand in 2012 was 38.6 million tons, unchanged from 2011. Asia accounts for 43 percent of total demand, North America for 25 percent, Europe for 17 percent, the Middle East and Africa for 8 percent, and Latin America for 7 percent, all by volume.
But value is different, said Agashe, based in Parsippany, N.J. Europe is the epicenter of high-value lubricants. North America is second, and Asia third.
Global lubricant base oil demand was 36 million tons last year, while supply was 38.2 million tons. Demand for Group I is going down, causing closures, Agashe said, but operating rates are also going down. In 2012, Group I plants operated on average at less than 70 percent, compared to Group II plants operations at more than 75 percent of capacity.
Today, Group I is balanced, although its sometimes difficult to source, Agashe continued. But we need to look at viscosity grade. Now we are long on light grades and tight on heavy viscosity and bright stocks. Heavy grades are in short supply.
The industry is seeing a supply push today. Significant volumes of Groups II and III are flooding the market; blending plants are reducing costs by replacing Group I, Agashe said. New Group II and III is supplanting Group I in areas where there is no technical demand for that high quality.
So, she asked, why are so many Group I plants still operating?
Many factors define the Group I environment. Ownership is a key consideration. Looking at global Group I production by refiner ownership, Agashe pointed out that 43 percent of production is owned by national oil companies which may find shutdowns difficult to impossible. Other factors favoring Group I include customers who blend industrial oils, byproducts that provide value, the region a plant is located in (the Middle East, Africa and Latin America see less pressure on Group I), and lastly, shutdown costs can be high. Further, she noted, some applications love Group I, like marine oils and transformer oils.
Group I plants are generally well established and fully depreciated. But sometimes crude sources change, and fuels drive the refinery, she cautioned.
Group I closures are coming, but every refinery has its own special circumstances. But five to six million tons will go away, Agashe concluded. This will result in a pricing premium for bright stock. Various potential substitutes have been suggested, including polyisobutene, naphthenics, polyalphaolefins and polyalkylene glycols, but none are price competitive, even at todays high bright stock prices.
Future high cost Group II closures are also possible, Agashe noted, as a lot of high cost Group I is already gone.