LONDON – Kline & Co. warns the base oil industry to prepare for substantial capacity rationalization and weak margins over the current decade, as demand growth slows and new capacity depresses the market.
At the ICIS World Base Oils & Lubricants Conference here in late February, Milind Phadke, energy practice director for consultancy Kline & Co., shared preliminary 2013 lubricant demand data and painted a dark picture for base oils through 2022. Kline believes that the base stock industry needs to be thinking of a future very different from the past, Phadke said. This future may see repositioning of ownership in base stock players due to inadequate returns over the rest of the decade.
Global lubricant demand in 2013, according to Parsippany, N.J.-based Klines preliminary estimates, reached 39.2 million tons, growth of 1 percent over 2012. The global lubricant market has weathered the 2008-2009 recession, Phadke said, as global lubricants demand in 2013 nearly achieved the high-water mark set in 2007.
But under the surface, much has changed in the past five years. North Americas and Europes combined demand share has declined from about 50 percent to 40 percent, Phadke said. And API Group I share in overall demand declined by about 15 percent from 2007 levels.
There is no more business as usual in global lubricant demand growth, which once ticked upward at a rate of some 1.4 percent per year, said Phadke. A more likely scenario may be modest demand growth from 2014 to 2017, followed by a decline to 2012 levels by 2022.
Turning to the outlook for base stocks worldwide, and relying on Klines recent study in which 2012 is the base year, Phadke said global base stock demand in 2012 totaled 36 million tons. Group II and III base stocks have significant surpluses of supply over technical demand, which drive their substitution of Group I, he emphasized.
Nearly 10 million tons of new Group II and III base stock capacity is planned through 2022, that will be offset by reductions in Group I supply. About 5.5 million tons of Group I capacity will go, Phadke forecast.
In 2004, he noted, Groups II and III base stocks were specialty products in limited supply, used only where there was technical need for their properties. By 2010 to 2012, Group II/III supply exceeded technical need, and they were used as universal base stocks, reducing tankage costs. Now, Phadke continued, there is enough Group II/III in most regions, and what is available in a region will first be used locally to avoid arbitrage.
The regional split of Group III and III+ supply will undergo a sea change, Phadke predicted:
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Regional Share of Group III Supply, as a Percent of Total |
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| North America | Europe | Middle East | Asia | |
| 2004 | 5% | 22% | 0% | 74% |
| 2012 | 2% | 10% | 29% | 59% |
| 2022 | 13% | 26% | 30% | 30% |
Source: Kline & Co.
The global placement of this Group III production will have a profound impact on formulations used in each region, Phadke noted.
Uncommitted new capacity must be carefully reexamined, he said. Accelerated closure of high-cost plants is almost inevitable. Group I is the obvious target, but naphthenics and smaller Group II plants are also at risk.
Base stock overcapacity has essentially destroyed inter-Group quality premiums, Phadke concluded, driving reformulations. Radical revamping of remaining Group I capacity may occur, to maximize production of heavy neutrals and bright stocks.