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PAO Revival


Surprise! Synthetic lubricants based on polyalphaolefins came roaring to life in 2004, turning in their strongest sales performance in at least four years.

PAO had a tremendous year in 2004, declared Marilyn Bradshaw, vice president of Colin A. Houston & Associates, a research firm in Brewster, N.Y. Production was up, and plant utilization – which had been 60 to 70 percent of capacity in prior years – was 90 percent and better. Demand unexpectedly improved, and all indications are that its continuing to improve and will do so at least through the first half of 2005.

PAO producers cheerfully admit to being caught off guard by the strength of the market, and say their big focus now is on keeping that momentum going – while dodging a few potholes in the road ahead.

We saw significant growth last year, said Kevin Ratliff, PAO product manager, Americas, at BP in Naperville, Ill. PAO in the past year saw double-digit growth, well into the teens. Frankly, it took us by surprise.

Mostly it was a continuation of growing demand for higher-performing lubricants on both the automotive and industrial sides, he continued. Were seeing PAO accepted and adopted more and more.

The economies in North America were improving in general in 2004, and so industrial activity was lifted, pointed out Chuck Bullock, PAO product manager for ExxonMobil Chemical in Houston. Every industrial report shows a rebound in growth in 2004, and that trend seems to hold across a wide variety of sectors. Our experience has been that demand for all higher-quality lubricants and especially demand for synthetics is growing at a higher rate than lubricants in general. And its being felt on both the automotive and industrial sides.

PAOs had a terrific year as far as volumes, agreed Jim Herman, PAO global business manager at Chevron Phillips Chemical in Houston. Id say it was record-strong. However, the feedstock costs were very high, and we saw costs climb at year end as ethylene price increases were passed through to us. So while sales were very strong, profits were somewhat constrained.

PAO producers did their best to pass along some of the mounting expense, said Houston Associates Bradshaw. With the market as tight as it is, PAO producers were able to put through two price increases, in July and October last year, although they were quiet about the amount of the increase. But decene, the C 10 molecule used to make most PAO, is in somewhat short supply already, and its price went up about 15 cents a pound in just three or four months, which gives you some idea of the upward pressure.

Costs and Competition

The largest producer of linear alphaolefins, the chemicals used to create PAO, is Shell Chemicals Cos. Sean Clarry, its Houston-based LAO end-use development manager, confirms that demand and costs alike were up last year. We observed double-digit increases in C 10 demand in the past year, he said, which contributed to Shell Chemicals increasing operating rates in 2004. As far as production costs are concerned, ethylene feedstock costs went up by 33 percent in the second half of the year alone.

Despite slimmer margins, Chevron Phillips Herman hastened to add, PAO producers are raring to go. We think 2005 will be at least as strong as 2004, he said, meaning well be able to sell every pound we can make, everything we have the capacity to produce and can get the economical feed-stock to make. As long as we can manage the costs, things should go well – but feedstock prices are very high.

BPs Ratliff stressed that the preceding years by no means were unhealthy: PAO sales volumes kept climbing all along. But the rate of growth wilted under the heat of lower-priced competition from Group III mineral oils. PAO found itself largely displaced from its single biggest market – passenger car engine oils.

We always had some underlying growth in the past five or six years, but we also saw some applications that didnt truly need the top performance of PAO being substituted out by Group III base stocks, Ratliff remarked. But the truly top-performing applications did grow, and so prior to last year, yes, Group III did take some share, and we saw a slow-down in growth. That changeout has been completed now, and the overall growth is moving ahead more strongly again.

We believe theres opportunity to displace some Group I and Group II base stocks in motor oils now, with Group III seeing that same growth, he continued. Group III and PAO do compete, but that piece of the pie – the high-performance market – is getting bigger all the time. Both are going to be needed.

Big Rigs, Big Appetites

So what drove PAO growth in 2004? Mostly, it was driving – truck driving, to be specific. In 2004, heavy- and mid-duty truck sales zoomed off the chart, and PAO was along for the ride.

U.S. sales of Class 8 trucks surged almost 44 percent in third-quarter 2004, versus the same period a year earlier, according the to American Trucking Associations Economics and Statistics Group. DaimlerChryslers Freightliner segment, which is North Americas market leader, reported sales of 151,200 units through November, versus 116,900 units the year earlier – a 29 percent leap. DaimlerChrysler reported similar growth in truck sales in Europe, Asia and Latin America.

The flood of new trucks meant a bonanza for PAO lubricant producers, who have done a brilliant job of making themselves indispensable to the heavy-duty market. Component suppliers such as Eaton, Dana and others now use PAO based synthetic lubes as factory fill on nearly every Class 8 truck axle, transmission and driveline sold, points out Christopher Toomey, vice president and regional business director, Synlubes Technology, at Cognis Corp. in Cincinnati. Cognis supplies Eatons Roadranger brand fluids for factory fill and the aftermarket.

Using PAO lubes enables truck builders to offer stronger warranties while extending drain intervals out to 500,000 miles of service, which has great appeal for fleet operators. Eatons truck division, for example, said it expected to post a 27 percent gain in sales for 2004, once all the figures were in. Additionally, the PAO-filled transmission and axle units that were launched four and five years ago are now showing up for their first oil changes – a bumper crop of PAO service-fill opportunities.

Heavy Lifting

The military has turned into a big PAO customer, too. For at least a decade, the military has maintained a number of specifications that demand synthetic performance in hydraulic fluids, engine oils, gears and transmissions. With huge amounts of equipment deployed in Afghanistan and then in Iraq – from M1/A1 Abrams tanks to armored vehicles to jet aircraft – the militarys take of PAO is far greater than before, suggested Bradshaw. An official with the U.S. Army tended to agree: For Operation Iraqi Freedom, our equipment up-time has to be 24/7, so lubrication is very important. And the Air Force uses a number of synthetics, too, like for aircraft hydraulic fluids.

Mark Pernik of Soltex Inc., in Houston, saw strong growth in the heavier viscosity PAOs. Soltex resells and distributes PAO to independent lubricant blenders, and Pernik, who joined the company last year from Chevron Phillips, said demand continues strong in gear lubricants and factory-fill for trucks. Some 100-viscosity PAO is getting used as a viscosity index improver, too, because it offers some shear-stability advantages. One of PAOs big advantages over rival Group III stocks, he added, is the ability to tailor the molecular weight and properties.

Its an advantage that PAO producers are tapping more deeply. Chevron Phillips Chemical has patented a process for making its Synfluid brand PAO from C 12, creating mid-vis PAOs that meet more stringent volatility and shear-stability specs. ExxonMobil Chemical, the worlds largest PAO marketer and manufacturer, also is beefing up its polymerization processes and later this year will introduce an upgraded PAO trademarked as SpectaSyn Plus. It will offer the very best combination of low-temperature fluidity and improved volatility, Bullock stated. And BP rolled out a new PAO 140 grade last month, under its Durasyn brand. It provides extremely low volatility, improved thermo-oxidative stability and high load-carrying capacity, said Ratliff.

Decene in Disarray?

Turn to the market beyond 2005, however, and a note of hesitation sounds. At year end, BP Olefins will permanently close its huge LAO plant in Pasadena, Texas – and some disarray in decene supply is sure to follow.

BP says it is closing the plant due to global oversupply of LAO, slow demand growth and high feedstock and energy costs. It instead will focus its LAO production at plants in Feluy, Belgium, and Joffre, Canada.

We are not going to stop making PAO, Ratliff emphasized. We make PAO at La Porte, Texas, about 10 miles away from Pasadena, and that plant will continue to operate. As for feed-stock, our LAO plants at Feluy and Joffre will run at higher capacities. We and other LAO producers will increase the operating rates and make up most of the decene now made at Pasadena. Production of more PAO based on C 12 will help, too.

If PAO continues as strong as it has been, Bradshaw cautioned, the Pasadena closing will pinch. LAO plants dont produce C 10 [decene] alone but create a basket of molecules, such as C 6 , C 8 and C 12 at the same time – and each needs buyers, she explained. If the other chain length alphaolefins dont see a rebound, olefin producers cant raise their operating rates to create the decene to meet demand, and PAO will feel the lack. Right now, C 4 , C 6 and C 8 are doing better, and it looks as through Chevron Phillips has ample [LAO] capacity to cover Pasadenas loss of production. The question is if other olefin producers can balance their chain lengths, to place the other molecules in the marketplace.

I would expect to see an impact on both C10 demand and supply over the next two years, commented Sean Clarry. Excluding any changes in PAO demand, the main drivers are Shell Chemicals new applications for C 10 and upcoming industry rationalization. Clarry expects that PAO producers and lubricant formulators will examine all their options – such as making and using more C 12 based PAO – during 2005, before the Pasadena plant closes.

Indeed, C 12 is doing well and growing as a PAO feedstock option, Bradshaw indicated, although so far its just a small piece of the action.

In the end, markets do have a way of supplying what they need, and demand will continue to be met, noted ExxonMobil Chemicals Bullock. Overall, we anticipate the supply of LAO should be adequate – there are a lot of ins and outs there.

Finally, not too much further on the horizon are GTL base stocks – gas-to-liquids technology that is being hyped as nearly synthetic and will begin coming to market by the end of this decade. Will we hear a reprise of the Group III success against PAOs?

Theres concern with GTL, as far as competition in some niches, yes, but it will still be a compromise in some applications versus PAO, CP Chemicals Herman said confidently. So the impact may not be as great as some say. Were all watching it very closely.

Most of all, were excited about the PAO business, he added. It has a bright future.

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