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The Coming Glut

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For the past two decades, the lubricants industry has watched as dozens of API Group I base oil plants closed. The trend is not even close to ending, says one energy consulting firm.

Purvin & Gertz believes the industry has significant over-capacity, thanks to the recession and events that preceded it. This will lead to shuttering of many more Group I plants in the United States and Europe.

As we go forward today, rationalization needs to take place, Senior Vice President Blake Eskew said in October during a presentation at the ICIS Middle Eastern Base Oils & Lubricants Conference in Dubai, United Arab Emirates. There are many, many smaller, weaker plants that are vulnerable, and we think we will see some more shutdowns.

Group I shutdowns are part of the industrys over-riding trend of the past 20 years: a shift from solvent-refined Group I base oils to more highly refined grades such as Group II and Group III. End-user demand for lubricants that last longer, that are cleaner and that perform over wider temperature ranges led to construction of Group II and Group III plants, and these reduced demand for Group I.

The situation was exacerbated by a surge in fuels demand that began in 2004 and lasted several years, noted the Houston-based Eskew. This spurred a boom in capital expansion projects, as refining companies raced to take advantage – and many of these fuels hydro-cracker projects were designed to include base oil components. Some of these have come online already, with new Group II and III capacity added by Petronas in Malaysia, Formosa Petrochemical in Taiwan, Pertamina-SK in Indonesia, GS Caltex in Korea, and others. Others are in the works, including Chevrons world-scale project in Pascagoula, Miss., but the majority of projects are located in China, Taiwan, the Middle East and Russia.

Unfortunately, before this construction flurry ended, the recession struck, reducing global lubricant and base stock demand by some 5 to 10 percent, Eskew said. Of course, some of this shrinkage is temporary and should loosen up as economies recover. But Eskew argued that the recession also caused some fundamental changes – encouraging motorists to drive less, for example – that in the long run will reduce oil consumption in the Western hemisphere.

This created an overhang in global base oil supply that could stretch out for the next five years. The next round of new construction will come onstream soon, and unless some older plants are retired, he cautioned, operating rates could remain depressed through 2015.

In addition, Eskew said, the economic downturn accelerated another trend that was under way before the recession: the geographic shift in energy (and lubricant) demand growth away from the West, or as Purvin & Gertz frames it, from regions west of the Suez Canal, to those east of the Suez.

The upshot, he said, is a geographic mismatch between todays base oil supply and the futures demand. Between 2008 and 2020, Purvin & Gertz expects 8 million metric tons per year of capacity to be added east of Suez, mostly in the form of Group II and Group III production, as the global center of gravity keeps moving east. North America will add much smaller amounts of Group II and III, but also will close more than 2 million tons per year of Group I, Eskew forecast.

Past rationalization already has trimmed the number of Group I plants in those regions. North America now has just seven primarily Group I plants, with a combined Group I capacity of approximately 12 million tons/year. Europe, including Russia but not including rerefiners, has some three dozen Group I plants, amounting to roughly 12 million more tons of capacity.

If more plants are to close, fewer and fewer candidates remain.

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