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Pale Oils Scramble

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Naphthenic base oils did not go gently into this dark recession: They fell with a splat, say suppliers. Every one of their key markets – industrial lubricants, metalworking fluids, process oils, electrical oils – has taken a hard knock, and pale oil refiners and marketers got bruised in turn.

The industrial market is feeling it most, reported Don Shook, operations manager at UniSource Energy, a specialty petroleum products marketer. Lots of regular naphthenics customers which had been buying one truckload a week are now down to just one truckload a month. Thats just standard now, its happening all over. One of our customers in the auto industry, who used to buy process oils for making things like door foam-rubber, from taking one railcar a month theyre now taking one every other month.

We see over-inventories, prices dropping, customers have stopped buying, building is down, everything, the Chicago-area marketer went on. We have a naphthenic transformer oil we formerly were selling a railcar a day to one customer; now its just one or two a week. In 45 years, Ive not seen anything like it.

Its a different world out here than last year, echoed John Banach, lube sales manager at Calumet Lubricants Co. in Burnham, Ill. Actually, last year refining exports masked the recession somewhat. Even though things slowed here in the U.S. in the first half, as the year went on there were shortages elsewhere that kept demand strong. Then the export markets withered, too.

In his 30-plus years with Calumet, he added, Ive never gone through this before. Calumet makes naphthenic base oil and other specialties at its Princeton, La., base oil refinery, with 6,900 barrels of daily capacity. The market for its products is tiered, and each segment behaves in its own way, Banach explained. In 20 percent of applications, such as hydraulic oils and non-detergent SAE 30 motor oil, people can switch between paraffinic and naphthenic base oils, and theyll buy whatever is cheaper at the time.

For another 30 percent of the market, such as rubber process oil and metalworking fluids, customers must use specific naphthenic oils – theyre unique, he continued. So when supply is short, youll see process oils getting strong prices. Much of this market is tied in to the auto-manufacturing market, though – tires, window weatherstripping, so on. You also see a lot of need for cutting oils, to make engine blocks. So whenever the auto companies are not building cars, thats a concern for naphthenics.

Pale oil manufacturer San Joaquin Refining in Bakersfield, Calif., is seeing the same effects. Everyone has scaled back, running at minimum levels until they see some light at the end of the tunnel, said Ryan Eberly, sales and marketing manager there. Agriculture and process oil markets are down right now. Pretty much every sector we supply is down, and thats affecting all refiners. Exports, usually strong for this West Coast refiner, are down too, excepting one recent sale to South Africa. Mexico has dried up completely, ever since the devaluation a couple months back of the peso by 30 percent, Eberly said. Their buying power has gone.

Although San Joaquins base oil capacity is 8,100 b/d, it has clipped production in response to the fall-off in demand. While it can process 15,000 b/d of crude oil, Eberly said it currently is running about 13,000, in pace with lower demand. Thats OK, he added pragmatically, we are selling everything we make at 13,000 b/d.

LOADING UP

Reeling from the recession, pale oil apppears set to veer further out of balance. The coming quarter will bring a big slug of new supply when Ergon Inc. opens the taps on a new hydrotreater at its Vicksburg, Miss., refinery. The plants current 12,500 b/d of capacity will grow to 19,000, and soon after it will add a naphthenic bright stock. In the face of current weak demand, Ergons expansion is the worst thing in the world to go through at this time, sighed base oil marketer Gerry Jackson, of Renkert Oil in The Woodlands, Texas.

It wasnt supposed to be. A few years ago, global demand was so strong and the market so hungry for pale oils, that Ergon foresaw a serious shortage of naphthenics by 2012, a deficit of 384,100 metric tons a year. A promising new application, substituting pale oils for aromatic extracts in tires, was coming in 2010. Transformer oil sales were booming, and customers everywhere were desperate for bright stock. All this fed the decision a few years back to build a new hydrotreater and add a propane deasphalting (PDA) unit.

Long-term, were very confident with that forecast, Ergon Vice President James Mike Burnett recently told LubesnGreases. Timing is the question now. We may need to increase the forecast period by six, 12 or even 24 months. Yes, bright stock for now is down in demand, but that market has been so undersupplied that once the economy picks up, this will continue to grow for us, he added confidently.

The Vicksburg expansion involves two phases, the Jackson, Miss.-based Burnett said. Part one, the hydrotreater expansion, gives more of the products we make today. Part two involves construction of the propane deasphalting unit to produce bright stock. A February turnaround is accomplishing planned maintenance and also completing some tie-ins to Vicksburgs new hydrotreater. The hydrotreater itself will stream in the latter half of the second-quarter.

The PDA is scheduled to come on line at the very end of the third quarter, or first part of the fourth quarter, Burnett continued. We already have approvals on the bright stocks it will produce, based on pilot plant production.

Any new source of supply creates waves, but UniSources Don Shook views this one as ironic. The market could have withstood it sooner, and in one and a half years, it will look like a good idea, he said. But because of the economy, the market is flooded with product right now.

HEAVY WEATHER

Banach at Calumet also contemplates some heavy weather when Ergons new supply comes to market. Calumets own slate of specialty products include low-aniline process oils, adhesives that go into everything from baby diapers to swim goggles – and bright stocks. We have more naphthenics already placed in the bright stocks area than anyone else, he reminded.

Since 1997, weve seen some notable naphthenic producers leave the market, including Exxon, Shell, Pennzoil and Witco, Banach mused. There were 10 U.S. producers then, now there are only five or six. So in the past few years, supply has been tight, very tight. Buyers didnt care so much what price they paid, they just needed the supply. In the current economy though, the question coming with Ergons expansion is, where will they get the business? Prices have fallen and so has demand. So now what?

Ergons Burnett reiterated his confidence that things will work out, observing that much of the new output is intended to replace harmful aromatic extracts that are being phased out of tire manufacturing. This is all a new application – the tire business – so actually our gains will be coming from the aromatics extract market, and we will be working to grow that conversion. For global tire producers, this is not optional. In North America, some aromatic extracts producers already have shut down, and more are rumored to be going to close. So some of the tire market conversion is moving faster than expected.

Overall, the expansions timing should be fine, Burnett said. Because we are a global supplier, we have more avenues open today for selling our production, more opportunity. Were supplying product now to Europe, and storing there too, as well as to Asia, South America, Africa.

Even with the downturn, even with that, we think its the right decision to move forward. We expect to be taking some market share and see some growth. The expansion lends itself to that because the facility will be more efficient, and equips us to be more efficient suppliers.

BUY NOW?

When prices went so high last year, base oil refiners had a banner year – but theyve paid for it in a heartbeat, said Shook. Theyve been dropping their prices at a 50-to-60-cent-a-month clip. Overall, I foresee prices staying relatively low, until the economy picks up and people get used to more demand. Everyone is trying to figure out, where is the bottom? This recession is more severe, deeper, and affecting a wider slice of our life.

From a purchasing perspective, customers have been educated by seeing prices come down every three to four weeks, remarked San Joaquins Eberly. Why place a large-volume order, if you think the price may drop in a week or two? I think crude will have to increase by $10 a barrel to trigger some purchases. Right now, we see folks are timing the bottom – but if crude goes up theyll jump in to buy.

Banach sees the same stand-off. There is such volatility in the pricing market. People dont buy, and theyre slow to commit. Customers decide to wait for a week or two, in hopes of seeing another price decrease.

He hopes some demand will be sparked by the U.S. governments economic stimulus package, the massive spending aimed at construction, energy, infrastructure and automotive manufacturing. The stimulus package could help, well see how it goes, said Banach. Construction is a large user of concrete form-release oils, for example, and if road building and construction begin again, that will help.

The stimulus package will help – any dollars going into the economy for road construction and other building would benefit our business, said Eberly. Half of our barrel is asphalt and residual oils, and those would benefit, too. All the sectors of our business have to be healthy, because like all refiners we make an array of products, not just base oil.

Speed, emphasized Ergons Burnett, is essential. If the money goes towards automotive, electrical grids, road building, farming – all of that could help us. But if the stimulus money doesnt flow until the end of this year, or start of next year, that wont be so good. Quicker would be better.

RIDING IT OUT

For now, the pale oil market awaits signs of economic life. Nevertheless, some customers are still buying, said Renkert Oils Gerry Jackson. Even in difficult times, certain sectors of consumers – like natural gas engine oils, adhesives, agricultural oils – lube oils wont go away for that.

So once industrial purchases of naphthenics pick up, does that mean the recession will be ending? Naphthenics are a good barometer, Jackson replied, but the chemical industry itself is even better. Chemicals are really the true building blocks for the economy, even for the auto industry. And right now, base oil has no problems at all compared to the chemical industry.

From California, Eberly suggested that early signals may come from transformer oil buyers. If construction starts up, that will require a bigger electrical grid. We notice very quickly when a surge in activity happens in the electrical industry. When a building project or development begins, the first thing they do is expand the electricity grid. Thats a good sign to watch for overall naphthenic needs, if transformer oil sales go up.

Any activity is eagerly watched for, but you have to ask, is this a real recovery or just a brief restocking? Banach cautioned soberly. Some customers appear to have shut their operations for a whole month, and have run their inventories down and are forced to buy enough to just get by. So while you might see a brief upturn when they reopen, you cant be overly optimistic that it will last.

It will turn around, but not for at least another six months, and maybe 12 or 18 months before a sustained and concrete improvement will be seen, UniSources Shook predicted. The only good thing is people can take this opportunity to look at their businesses. They might ask, do I have the right people in place for when things come back? This is when you can reposition the business as a whole, and make some good hires. Because it will come back.

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