Speaking in October at the ICIS Middle Eastern Base Oils and Lubricants conference in Dubai, Pedro Cardenes, general manager of Chevrons marine lubricants business, said the industry is seeing the unwinding of trade volumes from earlier record growth rates. There is more change happening now than at any time in recent history, and overcapacity is largely responsible for this situation. Cardenes believes the focus on reducing operating expenses will see lubricant suppliers grappling with increasingly complex market conditions in the next decade.

Overcapacity straddles all parts of the business, but container shipping has witnessed particularly overzealous expansion, amid optimism that freight rates would hold steady. In fact, rates have tumbled, and with container shipping accounting for 60 percent of all sea trade, according to estimates by The Economist, there is a pervasive nervousness throughout the business.

Last November, industry bellwether A.P Moller-Maersk announced third quarter profits had fallen by half, with demand for shipping growing a pedestrian 1 percent – the lowest since the 2008 financial crisis. Cardenes said several ship operators have been running losses since 2011.

Future of Marine Lubes

Falling demand, cost cutting and regulatory pressure are a potentially toxic combination for the marine lubricants market. Shipping companies have reacted to the downturn by slow steaming – the practice of operating transoceanic vessels, especially container ships and tankers, at less than maximum speed. Other measures include lower feed rates and the use of Triple E Class megaships capable of carrying more than 18,000 TEUs.

Ship owners want to protect [these] huge investments with highly engineered and adaptive lubricants. That will test the developmental resources and technical capabilities of lubricant providers over the next decade, Cardenes said.

Geeta Agashe, president of Geeta Agashe & Associates, said the concept behind using larger vessels is to improve efficiencies. The fuel required to ship one large load is far less than that needed to ship the same amount of cargo in two loads. An 18,000 TEU vessel is 35 percent more fuel effective than a 13,000 TEU vessel.

However, reduced fuel consumption results in reduced lubricant usage. Global lubricant demand has fallen sharply since peaking in 2008, and Cardenes projected compound annual growth rates of around 1 percent through to 2020. Asia-Pacific is expected to lead demand growth, but growth in Europe will decline. Marine cylinder lubricants and trunk piston engine oils make up the bulk of the market, with system oils a small segment in the overall scheme.

Aside from cost pressures, environmental regulations are placing an additional burden on ship owners and lubricant suppliers. The focus is on reducing sulfur levels in fuels to control emissions. An IMO agreement to reduce atmospheric pollution from ships saw limits on sulfur content in fuels reduced to 3.5 percent from 4.5 percent in 2012.

Cardenes said that if the IMO accepts current proposals, limits on fuel sulfur could fall to 0.5 percent by 2020. In designated Emission Control Areas, a 0.1 percent limit was imposed in 2015, and the United States has also reduced emission levels for vessels operating in its waters.

In December 2013, the U.S. Environmental Protection Agency mandated the use of environmentally acceptable lubricants in any equipment that has an oil-to-sea interface, Cardenes added. Environmentally Acceptable Lubricants must meet standards for biodegradability and toxicity to minimize any adverse environmental impact. The good news is that nearly all marine lubricant producers have a branch of EAL. It has been a challenge in the very short period of time demanded.

The ECA region is expanding, and that will impact the operation of marine two-stroke and four-stroke engines. New engine designs are already underway, and Cardenes believes these developments will demand updated cylinder and trunk piston lubrication strategies for newer low base number engine oils designed for ECA-compliant fuels.

Blending on board, which recycles all on-board lubricants, and automated cylinder oil mixing are putting further pressure on the traditional lubricants business as ship owners seek to drive down operating expenses. They are also evaluating alternative fuels such as liquefied natural gas and methanol. With other emerging technologies, these developments are bearish for the marine lubricants business.

Cardenes pointed to exhaust gas aftertreatment systems, notably selective catalytic reduction and exhaust gas recirculation, as additional challenges to the business. Despite the tightening regulatory environment, exhaust gas scrubbers could allow continued use of high-sulfur fuels, providing major cost advantages for ship owners.

With regulatory pressures and increased availability, Cardenes expects faster adoption of marine lubricants based on Group II base oils in the short term. OEMs are focusing on reducing fuel consumption, and that is likely to increase collaboration with additive and lubricant suppliers.

For their part, lubricant suppliers will need products that cover the full spectrum of lubrication scenarios. Cardenes said the marine lubricants business will have to raise its game and offer reliable and efficient supply when and where needed. That suggests only major suppliers will able to meet global supply commitments and growing requirements for technical support.

Much research is focused on the solubility of heavy fuel oil combustion products such as asphaltenes in Group II formulations. Cardenes said solubility is important for system oils used in large-bore slow-speed engines and high-BN trunk piston engine oils used in marine medium-speed engines.

Solubility is less of an issue for marine cylinder lubricants that are consumed during combustion and continuously refreshed. That is in contrast to system oils and trunk piston engine oils that are recirculated.

Middle East Well Placed

Despite the uncertainty facing the marine lubricants market, some suppliers stand to gain from the market aligning to the new reality. The United Arab Emirates has become the go-to base oil hub in the Middle East. According to Cardenes, that bodes well for the marine lubricants sector. The U.A.E.s foremost advantage is its strategic location [between] the Far East and Europe. It sits at the crossroads of international trade and commerce.

Even so, Cardenes said to sustain its leadership position, the country must address security challenges. The growth of the U.A.E. as a logistics hub poses challenges, foremost of which is cargo security. This is a concern, especially as the area positions itself as an international multimodal logistics platform.

The outcome will have a bearing on the entire lubricants market, but the marine lubricants business is particularly vulnerable. Nevertheless, local finished lubricant suppliers, including Abu Dhabis Adnoc and Dubais Enoc, seem to be betting that the sector will overcome the challenges and port expansion – a key success factor for the marine lubricants sector – will continue unabated. Cardenes said there is a fine balance between the need for screening and the smooth operation of international trade and commerce.

Agashe remains confident that the region will hang on to its leadership position, but not without competition. The Middle East will continue to be a very important market for the marine lubes business. Among the top 10 container ports in the world is Jebel Ali Port in U.A.E. at number nine. The rest of the top 10 are located in China, one in Singapore and one in South Korea.

It seems inevitable that the downturn in global shipping will force consolidation in the lubricants sector, including the possibility that some may exit the sector. We have seen some players sell product lines for example, Agashe noted. Marketers are constantly reviewing their product portfolios, and if they are not getting the returns they expect, they make product rationalization decisions.

However, she declined to comment on where consolidation may occur. At the moment, the marine lubricants business is dominated by ExxonMobil, Shell, BP Castrol, Chevron, Lukoil, Gulf Marine and Total. Analysts say the pressing need for a global supply solution and technical support could be a main driver of consolidation.

Iran could also cause a disruption when it returns to international oil markets. Richard Clayton, chief analyst at IHS Maritime & Trade, said the lifting of sanctions will be among the top five trends impacting the global marine industry in 2016. In November, he estimated easing sanctions would add about 500,000 barrels of oil a day to global supply by the end of 2016.

Irans re-entry into the oil export market wont help tanker operators directly because most of the oil will likely be shipped in National Iranian Tanker Co. carriers, sidelined in the Persian Gulf while sanctions were imposed, he said. The development is likely to squeeze marine lubricant margins and undermine the wider tanker market.

Unchartered Waters

Despite the worldwide glut of merchant vessels, three carriers are committing billions of dollars to building more ships, said Agashe. Although the resulting impact on the marine lubricants market may prove to be limited, the impact will be much larger on smaller lubricant suppliers that are exposed to less efficient shipping operators.

With the gravitation to fuel-efficient megaships, it is unlikely smaller shipping companies can compete in a market already reeling from overcapacity and depressed margins. If, as analysts predict, there is a torrent of consolidation in the shipping industry, lubricant companies will have to vie for business in a market populated by fewer customers.

Marine lubricant companies will also have to contend with demands for a global servicing capability and the relentless focus on costs by shipping operators. Regulators add to the downside risk for lubricant suppliers, as strict environmental standards will push all but the most efficient shipping operators out of business.

Some larger ship owners have complained the increase in emission regulations is difficult to police, and less scrupulous operators will skirt regulations because of the logistics involved in enforcement. That may be about to change, with the probability that pollution sniffing drones will be used in certain controlled emission areas.

The next decade is expected to be one of intense complexity for lubricant suppliers. How they navigate the multiple challenges is likely to determine whether or not they survive.