The changing supply-demand balance for various base stocks is impacting the selection of base stocks in various lubricant formulations, Anuj Kumar, a project manager in Klines energy practice, said during an online presentation Oct. 7. Currently the market is having a surplus of Group II and Group III base stocks. And its consumption is growing due to the mixed effects of supply push as well as demand pull.

He noted the current market differs from the historical scenario where the supply of high performance base stocks was tied to technical demand. We will witness more penetration of these high-performance base stocks in those applications where there is no such technical demand, he said.

Based on announcements to date, Kline expects about 6 million to 6.5 million tons of new base stock capacity will be added over the next 10 years, with much of that expected within two to three years. This is certainly more than incremental demand created over the same period, and some Group I capacity would have to be rationalized in order to maintain global supply-demand balance, he said. Including capacity rationalizations announced to date, Kline forecasts about 5 to 5.5 million tons of existing capacity will have to rationalize to maintain global supply-demand balance.

While Kline estimated global base stock capacity at around 55 million tons in 2014, supply was estimated at only about 38 million metric tons, indicating plants only ran at about 75 percent of capacity, on average.

Group I plants had the lowest operating rates of all API groups, due to lower demand, he said. He noted that in 2014, refineries with Group II plants had the highest average operating rate.

Kline estimated base stock demand at about 34.7 million tons in 2014, not including Group IV/V base stocks. While this appears to imply an overall surplus, Kumar said the reality is different.

In Klines study, supply and demand estimates are developed independently so some difference is expected between the two estimates. When we interview suppliers, supply is usually overstated as it is based on average production rate at the time of survey applied to the full year, Kumar said. The actual production may be lower due to unplanned outages, changes in feedstock and final product slate. For the plants that dont participate, we assume operating rates similar to others in the region, which may have introduced a small amount of errors.

He noted that very light ends are not suitable for the lubricants industry, and that the base stocks demand estimate doesnt capture consumption outside the lubricants industry, such as brake fluids and process oils.

Group I/Bright Stock

Despite a continuously declining market, Group I is still the biggest segment, but its share of overall demand is less than half of the market, Kumar said. The market for Group I is impacted by a lot of changes driven by stringent technical requirements and the excess supply of other base stocks like Group II and Group III. The stricter Noack [volatility] requirements in the newer standards for engine oil make it increasingly difficult to use Group I.

Group I base stocks demand will continue to decline as it becomes obsolete to blend lubricants conforming to newer standards, Kumar said. Even in industrial applications, it will face competition from Group II and Group III base stocks.

He noted that in certain industrial applications, such as industrial gear oil, and in some marine applications, use of Group I – bright stock, basically – is essential can cant be replaced by Group II or III base stocks because Group II and III plants do not make oils as heavy as bright stock.

Group II/III

Group II (including II+) represented over a quarter of the global demand for lubricant base stocks in 2014. This category has been a key factor in the growing supply-demand imbalance in low- and high-viscosity based stocks. Between 2004 and 2014, the share of Group II and III in overall supply has grown from 22 percent to over 40 percent, which represents an average annual growth rate of 9 percent of high quality base stocks, he said.

Over the past four or five years, new supply creation of Group III base stocks has continuously outstripped its demand growth, thereby creating a huge oversupply of these base stocks in the market, Kumar noted. As the capacity is quite higher than demand, marketers try to push their product into non-core applications for these base stocks.

He noted that on a global basis, automotive OEMs are now trending toward recommending more lighter-viscosity grade motor oil. Gradually, older vehicles have to be scrapped and replaced with new vehicles using lighter grades, he noted.

The nature of Group III plants is changing. In the past, much of the Group III feedstock supply was from the isomerization of slack wax produced by Group I plants, Kumar pointed out. This process is becoming increasingly unviable as it uses a scarce product – slack wax – to make Group III base stock, a product that is in surplus, he said. So the majority of Group III base stock now is made by hydroprocessing of fuel hydrocracker bottoms or gas-to-liquid raffinate, Kumar explained.

The study anticipates Group III base stocks will grow the fastest over the next five years. Most of this will be driven by supply push rather than technical considerations, he said.

The study is titled, Global Lubricant Base Stocks: Market Analysis and Opportunities.