For example, the API European Group I markets have been radically affected by the removal of base oil production at a number of primary sites over the last two years. Closures and cutbacks have tightened the availability of Group I base oils throughout Europe.

Some of this vacuum has been filled by exports from Russia, Belarus and other Eastern European sources such as Uzbekistan. But the fundamental reasoning behind the closures and cutbacks on Group l production was the presumed continuing move to Group II and Group III base oils. These base oils contain less sulfur and have higher saturates and viscosity index, proving more effective in blending the majority of new generation finished lubricants.

To balance the markets within Europe, ExxonMobil has announced it will extend its Rotterdam cracker unit to potentially produce around 2 million tons of Group II base oils. In addition, imports from majors in the United States, the Middle East and the Far East may take an increasing share in the European Group II base oil markets.

The move to Group II appears to be an industry accepted transition, with the continuing and increasing availability of Group II grades taking up the slack where Group l production has disappeared. When examined numerically, the replacement volumes make sense with these grades almost substituting for lost availabilities.

The scenario is somewhat different for Group III base oils, with up to three grades representing production: 4, 6 and 8 centiStokes. Group III has a relatively well-defined market of about 850,000 tons per year currently being produced domestically within Europe. However, this market is also being seen as an attractive growth area by relatively new sources in the Middle East, Far East and Russia. Prior to the recent addition of the facility at Cartagena, Spain, Group III markets may have been described as balanced, with some domestic suppliers augmenting European sales by lifting material from Middle East and Gulf sources and reselling alongside local supplies in this segment of the market.

Within the space of one year, this scenario has changed to a massive over-supply situation, with new sources offering partially qualified and semiapproved grades into what is seen as a huge growth market. This is not merely a European regional problem but perhaps is a global phenomenon that is only growing larger by the opening of new production facilities.

Incumbent suppliers are now defending market share, while newcomers are buying their way into established markets. And while much of the new production does not carry full approvals, the new base oils are identical in some cases to existing material, which means that it is only a question of time before full OEM approvals are granted.

Markets that were once the preserve of companies such as ExxonMobil, Neste, Total, Petronas and SK-Repsol are being invaded by new production such as Russias Tatneft and UAEs Adnoc. The new players are not minor entities and own large production units with steady streams of feedstock that can be guaranteed.

Material from these sources has to be placed into already saturated global markets that are also facing slow economic growth. While the problem cannot be solved easily, new producers appear to be determined to enter the market. And with only one real tool at their disposal, they are willing to slash prices to gain a toe-hold in various markets.

Group III is distinctive from other base oil sectors, where buyers can be classified into various groups with different criteria being applied to purchasing methods. For example, some oil majors and additive suppliers purchase Group III directly in large bulk parcels. Some national oil companies in various parts of the world also require these oils and buy in large cargo-sized parcels from producers.

Another faction in the market is distributors or resellers who are responsible for the availability of Group III base oils perhaps within a defined territory or a region. They serve a variety of smaller third party customers who buy in truckloads or smaller quantities.

AII types of buyers are present in the European market, producing a melee of pricing activity that has often been difficult to define. The smaller spot or contract buyers are relatively easy to identify in pricing terms, but the larger bulk buyers are not so easy to define in terms of contract prices for the range of grades being bought. It is estimated that large buyers could be paying 25 to 40 percent less than spot prices identified from reselling sources.

With little growth or expansion in Group III markets, it is difficult to envisage where the continuing spike in production will ultimately lead. And with further production from Russia, Bosnia and Germany being commissioned between now and 2019, the over-supply problem can only get worse. Coupled with this, other more subtle changes are afoot, with marketing contracts up for renewal that may cloud the scene even further.

Even by cutting prices to buy market share, sellers can only physically move so much material because the market is a finite entity. Therefore, unless the market starts to expand, producers will have no choice other than to restrict production quotas. This could affect returns on capital investment by trimming throughput volumes, which is certainly not an ideal scenario for any producer, particularly those with new projects recently or about to be commissioned.