A new consultants report predicts the North American lubricant industry will face a shortage of Group II base stocks within four years. As a result, it says, some independent lube manufacturers could end up locked out of automotive lubricant markets.
The study, Business Opportunities in Lubricant Base Stocks – North America, was conducted by Petroleum Trends International Inc., of Metuchen, N.J., which announced its conclusions yesterday. The firm said market forces should balance supply and demand of Group II and Group II-plus by the end of this decade – but that independent blenders could get hammered in the meantime.
Its what happens in the interim that should be of concern to independent lubricant manufacturers, because it is during this time that supply of Group II will be short and Group II-plus will be tight, President Thomas F. Glenn said. This issue, along with the continuing exodus of manufacturing from our shores, consolidation, escalating operating costs and other market dynamics could result in a perfect storm – a storm that puts some independents out of business.
Most observers agree that the GF-4 passenger car motor oil upgrade, scheduled for commercial introduction next July, will further shift base oil demand from Group I to premium stocks. Some, such as Kline and Co. consultants of Little Falls, N.J., have predicted that Group II supply will continue to meet demand.
The PetroTrends study notes that GF-4 is just one of several specification upgrades expected to increase demand for premium stocks, others being the PC-9.5 and PC-10 diesel oil standards and General Motors Dexron IIIH specification for automatic transmission fluids. The firm forecasts that North American demand for Group II will exceed supply by 150 million gallons in 2007.
PetroTrends added that the imbalance will be exacerbated by the fact that most Group II suppliers are also major marketers of finished lubricants.
Major oil companies that produce only Group II do not have the option to satisfy their captive demand with Group I unless they buy or swap, Glenn said. Instead, they meet their captive demand with Group II, even if this quality is not technically required to meet the performance specifications of the product lines where it is used. Only the remaining Group II will be made available to independent blenders on the merchant market.
Glenn said the shortage of Group II could end up larger than the report predicts if refineries encounter production problems or if a plant closes due to a merger.
If independents cannot obtain Group II, they may not be able to make some grades of passenger car motor oils. But Glenn said they will face other problems, too. Lack of Group II could affect their ability to offer high quality in other types of lubes. Or it could drive them to use Group III, thereby taxing storage capabilities and raising expenses for items such as testing and certification.