The emphasis on fuel economy and a modernizing vehicle park will drive an increase in the use of lighter viscosity passenger car engine oils. According to Milind Phadke, director of the energy practice at Kline & Co., this shift will compel formulators to make significant changes to their base stock blends to provide the required performance. In a presentation at the 18th ICIS World Base Oils & Lubricants Conference in London in February, he described three issues to consider when making shifts to base stock blends.

First, Phadke said, Lubricant quality requirements will no longer shape base stock blends. Between 2004 and 2012, the share of API Group II and III in the overall supply chain has grown from 22 percent to 40 percent (an average annual growth of 9 percent in high quality base stocks). Today, with intergroup price compression, viscosity is far more important than viscosity index and other performance characteristics in selecting base oil.

He added that lubricant performance is no longer a good predictor of base stock demand because formulators have multiple routes to provide a given performance level. Given the price compression and the large oversupply position, many of these routes can provide a competitive cost position.

The second issue is uncertainty about how suppliers will behave because their behavior will greatly influence base stock blends. Phadke said that three questions are critical here: When and where will Group I supply decrease? When and where will Group II/III supply increase? Where will new plants place their products?

Nearly 10 million tons of new Group II and III capacity is planned between now and 2022 and will displace traditional Group I markets, he said. And shrinking Group I supply will shift formulations to Group II and III irrespective of technical needs.

Overcapacity has essentially destroyed intergroup quality premiums; therefore, substantial reformulation of traditional Group I technical demand will continue for low and medium viscosity grades, Phadke said. As a result, radical revamping of remaining Group I capacity may occur to maximize production of heavy neutrals and bright stocks.

He noted that in 2004 Group II and III were considered specialty products in limited supply, used only where there was a technical need. By 2010 to 2012, however, 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 and III available in most regions. Therefore, to optimize logistics costs, what is available in a region will be used locally first to avoid arbitrage.

In addition, the regional split of global Group III and III+ supply will undergo a significant change by 2022. The global placement of this production will have a profound impact on formulations used in each region, Phadke said. A key question influencing blends is which applications suppliers will pursue.

The third issue to consider is how blenders (base stock consumers) behave, which will also influence the blends used in the market. Suppliers need to understand what is important to each segment of blenders, Phadke said. Are they concerned about reducing complexity, reducing cost or supporting claims?

Suppliers also need to understand how each segment of blenders makes base stock decisions, he said. Here, it is important to understand the extent of formulators knowledge of blending options, whether they are susceptible to peer pressure and industry fads, and if they are risk averse. These questions are critical, Phadke contended, because the base stock that is selected by early innovators can experience a virtuous cycle of increased availability and applicability, leading to increased usage

Klines research shows that planned additions to base stock capacity through 2022 imply continued low levels of effective capacity utilization for an extended period, from 80 percent in 2012 to between 72 and 82 percent by 2022. This puts further pressure on at-risk producers, said Phadke.

As a result, Kline believes the base stock industry needs to be thinking of a future very different from the past. As Phadke said, Demand growth drivers are changing, and strong growth is not a given. Slower than historical growth in demand, combined with rapid capacity additions, will depress medium-term capacity utilization. As a result, he said, accelerated closure of high-cost plants is almost inevitable. Group I plants are obvious targets, but naphthenics and smaller Group II plants are also at risk.

Phadke concluded by saying, This future may see repositioning of ownership in base stock production, due to the potential for inadequate returns on capital over the rest of the decade.