The global rubber process oil market in 2013 is estimated at close to 3 million tons. While the differences between regions in terms of growth rates and product consumption will persist into the future, most markets are expected to converge in terms of types of products used due to the fact that more countries are adopting regulations for environmentally friendly RPOs and tire labeling.

Europe, a key region, is the third-ranked rubber process oil market with 15 percent of the total. Two key European regulatory initiatives are influencing the global market.

First, a regulation banning the use of oils containing high polyaromatic hydrocarbon content was adopted by the European Union and followed by a number of other countries. This has virtually eliminated the use of distillate aromatic extract in the EU and adversely affected demand in countries that export tires to the EU.

Second, tire labeling legislation was implemented in the EU to improve safety and fuel economy, and reduce noise pollution. Around 20 to 30 percent of fuel consumption and more than 24 percent of carbon dioxide emissions from vehicles can be attributed to tires.

To improve the fuel efficiency of vehicles and thereby reduce emissions, the EU adopted a tire labeling regulation on November 1, 2012. Tire producers now display the fuel efficiency of their tires on product labels, allowing consumers to make informed choices. Solution styrene-butadiene rubber tires provide the best fuel efficiency; therefore, their demand is expected to rise in the coming years as the trend toward tire labeling spreads globally.

As emerging countries look to adopt new regulations, they will use Europe as a template. Moreover, this will benefit the market position of emerging products that fill the void created by the regulatory ban on distillate aromatic extract.

Globally, Europe has the highest consumption of treated distillate aromatic extract, due to the beneficial impact of regulations. Despite its dwindling demand, distillate aromatic extract still accounts for about 23 percent of the regions market. This is due to demand from non-EU markets like Russia and Turkey.

Because of the regions excess API Group I capacity, production of mild extracted solvate has increased in Europe. As a result, Europe also consumes high volumes of mild extracted solvate. However, its future growth will fluctuate due to falling Group I capacity in the region.

Another trend in the tire industry is the shift of production from developed economies to emerging markets due to low labor costs. In the last 15 years, a multitude of European tire factories have closed.

As a result of growing automotive production and shifting tire production to emerging markets, tire production in Europe will lag behind that of competing markets, but will still persist. Much of the growth in Europe will take place in the emerging economies of Eastern Europe due to increasing tire production, which is driven by domestic and export demand.

Distillate aromatic extract demand will continue to decline as an increasing number of rubber process oil suppliers and tire manufacturers outside Europe proactively move to low polyaromatic hydrocarbon alternatives. Other countries are contemplating regulations similar to those of the EU that will drive a further decline in distillate aromatic extract consumption.

EU regulations banning distillate aromatic extract, tire labeling legislation and the burgeoning effect of these regulations on other markets is changing the industry. The regulations have created an opportunity for value growth for rubber process oil suppliers. This is in stark contrast to the Group I and naphthenic lubricant base stock market, where value growth is limited. As a result, a number of companies are investing in product and application development and exploring different niche opportunities.

The concept of tire labeling has progressed in other parts of the world. Based on the strong performance in Europe, treated distillate aromatic extract, residual aromatic extract and treated residual aromatic extract, used in conjunction with solution styrene-butadiene, are considered the most suitable products to meet tire labelling requirements. Demand for these rubber process oils, particular treated distillate aromatic extract, will benefit from the growth in tire labeling.

Europe is expected to grow at a CAGR of 1.5 percent until 2023. Most of the growth will come from Russia and Turkey. In fact, with the exception of Germany, most EU markets will see a decline in demand due to stagnant tire demand and production. Demand growth at a product level will see a lot of variance.

For example, treated distillate aromatic extract, treated residual aromatic extract and naphthenic oil will compensate for the continuing decline in distillate aromatic extract, which is expected to virtually vanish by 2023. Moreover, treated distillate aromatic extract and other high performing and efficient products will come to the forefront of the global rubber process oil market.

Despite the emergence of other markets, Europe is a key region in driving the rubber process oil market due to its established track record. And its regulatory background is the template emerging markets will follow.

Kunal Mahajanis Project Manager at Kline & Co. He can be contacted at Kunal_Mahajan@klinegroup.com.