In a presentation at Junes ICIS Asian Base Oils & Lubricants Conference in Singapore, Purvin & Gertz Vice President Blake T. Eskew said this shift will have different effects on different regions. He predicted it will be most trying in Europe where pressure for plant closings will be greatest.

Since 2004, Eskew said, the global market witnessed expansions and new plant openings that added more than 10 million metric tons per year to global capacity – an increase of 25 percent – and virtually all of it was API Group II or Group III. At the same time, full and partial shutdowns took approximately 8 million t/y out of circulation, mostly Group I. The net effect was a capacity increase of 7 percent.

Quite a few new plants and expansions remain in the pipeline. Purvin & Gertz counts approximately 9 million t/y of capacity additions scheduled to be completed by 2017. Against that, Eskew said, only about 1 million t/y of reductions have been announced. As things stand now, therefore, the industry faces a net capacity increase of 16 percent in the next five years.

New capacity is now being added at an unprecedented rate, he said. He added, though, that one element is missing from that analysis – the likelihood of more plant closings that have yet to be announced but would happen within the given time frame. Closings are normally announced with much less lead time than construction projects. Numerous plants have closed in recent years, and Purvin & Gertz is confident that more will follow.

The question is which plants will close. Eskew said the greatest pressure will fall on European facilities producing Group I oils. Numerous Group I plants in Western and Eastern Europe were rationalized in recent years, and more will probably do so, he said. The biggest problem for the European Group I plants is the shift in European base oil demand from Group I to Group III and to a lesser extent Group II, he said. Export opportunities are drying up, too, and those plants simply wont have any place to sell their oil.

Overall, the introduction of more Group II and III capacity is good news for European blenders, because the region will need growing volumes of those grades as the quality of lubricants used there continues to rise. But the transition will turn the region from a large net exporter of base oils into a large net importer, and this will cause challenges for some blenders.

Some blenders are going to lose suppliers, Eskew said. Maybe theyve been pulling base oil from a refinery next door, and that refinery is going to close on them. When that happens, their logistics and supply chain will have to change, and thats not always easy. Its usually a bigger problem for [blending] plants that are landlocked.