Huang told the Fuels & Lubes Asia Conference here on Mar. 2 that excess capacity in the petroleum additive industry is gone, and the current tightness is here to stay. Although the chemical industrymay historically cycle from boom to bust every four years, the current cycle will be eight to 10 years, Huang said. Eventually there will be new capacity, but no one will rush to build.
Huang, based in Richmond, Va., offered an overview of the supply-demand balance in the global petroleum additives industry. The industry has seen relentless consolidation in the past 15 years, he said. The goal is to get bigger, to achieve economies of scale. Between 1992 and 1996, Afton Chemical (formerly Ethyl) acquired Amoco Additives, Nippon Cooper and Texaco Additives. Lubrizol acquired Adibis in 1998, and the next year Paramins and Shell Additives formed the Infineum joint venture.
Our customers have undergone tremendous consolidation as well, Huang continued, putting great pressure on their additive suppliers to reduce costs. A major way to do this was to shutter capacity.
From 1992 to 1998, Afton partially or wholly shut down capacity at six plants, Infineum at one, and Lubrizol at three. In 1999 the pace picked up. Since then, Afton has partially or wholly shuttered three more plants, Chemtura two, Chevron Oronite one, ENI one, ExxonMobil Chemical one, Infineum five, and Lubrizol three. Further reductions are planned, including Chevron Oronite in Brazil, Infineum in Mexico, andthe remainder ofLubrizol’s Bromborough, U.K. plant.
It is Aftons estimate that between 500,000 and 600,000 metric tons of capacity have been shuttered, Huang said, worth $1 billion.
At the same time, only limited capacity was added. Oronites Singapore plant is the only big new plant added in the past 10 years, and various suppliers have de-bottlenecked plants. Huang estimated that new capacity has totaled less than 200,000 metric tons, resulting in a net loss of more than 300,000 tons.
Small wonder the additives industry is tight today, Huang said. Ten to 15 percent of capacity has been removed, while growth has increased total demand by 10 to 15 percent in the past 10 years.
Is the industry due for another major expansion? Huang asked. His answer: Unlikely. Demand growth is slow, due in great part to extended drain intervals and fill-for-life fluids. Additive suppliers face significant uncertainties, including GTL and low-sulfur fuels, low SAPS and raw material shortages. And not least is low return on investment.
Like his counterparts at Lubrizol and Infineum [see Lube Report, Feb. 22, Additive Supply: Tight and Tighter], Huang predicted that worldwide lubricant additive demand, now 3 million tons per year, will grow at less than 1 percent per year through 2010.
Regional shares of additive demand will change slightly. Over the next five years, North American additive demand will be essentially flat. In Europe, the Middle East and Africa, demand will decline, while the Asia Pacific region will see 5 percent annual growth and Latin America will see 2 percent annual growth through 2010.
Base oil quality will improve. In 2004 API Group I base stocks accounted for about 75 percent of total global demand. That number will drop to about 67 percent by 2015, said Huang. Both higher quality base stocks and the reduction in gasoline and diesel sulfur mean reduced additive demand over the next decade.
The additive industrys raw materials are very tight, Huang said. No one is investing in alpha olefins today, and there are great shortages of base oils in North America and Europe. Ethylene amines, maleic anhydride, antioxidants and other additive building blocks are also in short supply.
Finally, said Huang, poor return on investments make any major lubricant additive capacity increase unlikely. The additive industry is seeing low margins on its engine oil additive business, and faces high research and development costs. When gross profit margins are in the single digits, offset by 10 percent R&D costs, said Huang, there will be no new investments.
What does this mean for lubricant marketers? Security of supply will become more important, and planning is critical. In addition, he noted, Lube blenders are seeing base oil price increases every two weeks. They must increase prices on finished lubes.
Aftons strategy, Huang said, is to support and grow with our current customers, and to continue to invest in driveline, industrial and fuels sectors. Afton will conduct limited de-bottlenecking in the engine oil sector to support its customers, and will engage in minor regional investments to better serve new customers, particularly in the Asia Pacific area. And finally, said Huang, Afton will create high performance products with consumer benefits and claims.