In a recent presentation, Anuj Kumar, a project lead in Parsippany, N.J.-based Klines Energy Practice, discussed results from the companys recently completed research on lubricant base stocks, synthetic base stocks and bright stock.

Kline gauged potential lubricant base stock supply in 2012 – operable capacity for API Groups I, II and III plus naphthenics – to be about 38.2 million metric tons. Group I still accounted for just over half of that total in 2012, the market research firm said, while Group II accounted for slightly more than a quarter and Group III and naphthenic shared the remainder of this volume.

During 2012, Group II plants enjoyed the healthiest operating rates – 76 percent of capacity on a global basis – while naphthenic plants operated at close to 73 percent of their global capacity for the year. By contrast, the worlds Group I and Group III plants ran at rates averaging below 70 percent, Klines research indicated.

Currently the market is experiencing a surplus in Group II and Group III base stocks, Kumar noted, with supply playing a greater role than technical considerations in determining which category of base stock to use in various applications. He pointed out that the market is witnessing a shift away from historical patterns, where the supply of high-performance base stocks was tied with demand which was mostly in-house.

The emerging scenario is one where the supply of high-performance base stock is far in excess of technical demand, and much of it is merchant [market], Kumar told listeners during the Sept. 25 webinar. We will witness more penetration of these high-performance base stocks even in those applications where there is no such technical demand.

Group I and Bright Stock

Group I still accounts for more than half of base oil production, though its share has decreased continuously in recent years. Kline expects that trend to persist through the next five years at least. Group I demand will continue to decline as it becomes obsolete to blend lubricants conforming to newer standards, Kumar said.

The global bright stock market was balanced in 2012, with total demand of about 2.7 million tons, Kline found. However, the situation differed from region to region, Kumar pointed out. Europe, the largest producer of Group I base stocks, produced more bright stock than its demand and hence was a net exporter; con-versely, the Asia-Pacific region had a significant deficit for bright stock and required imports to meet demand.

The use of bright stock is widespread in applications that require medium- to high-viscosity lubricants, Kumar said. The percentages and applications for bright stock in lubricant formulations are highly inconsistent by region, largely due to the differences in engine oil requirements, as well as the number of specialty applications in established versus developing markets. Typical applications for bright stock include automotive and industrial gear oils, greases, heavier engine oils (both industrial and automotive), and process oils.

Over a period of time, the rationalization of older and less efficient Group I base stock plants has caused a decline in bright stock supplies. Kumar noted that the bright stock market witnessed a significant deficit in 2010, which resulted in prices shooting up. As a result, the blenders were forced to explore substitutes to keep their formulations economical, he said. Going forward, bright stock use in automotive oils will decline, as multigrade engine oils replace monogrades and viscosity shifts lighter with emissions and fuel economy requirements.

Other applications may still require the extra heft and weight of bright stock; for these, Kline posits that polyisobutene is likely to be the most viable substitute, despite PIBs higher cost.

Kumar noted that Group I base oil is still a key base stock for formulating automotive lubricants in markets like Asia-Pacific, South America, Eastern Europe, Africa and the Middle East.

Industrial segments remain mainstay applications for Group I base stock; however, it is continuously being challenged by Group II in applications like turbine oils, hydraulic fluids, gear oils and railroad oils, he added.

Group II

Demand for Group II and II+ is expected to grow at about 4 percent annually through 2017.

Over the last 10 years, Kumar explained, Group II has replaced much of the Group I used in consumer automotive formulations, particularly passenger car motor oils, heavy-duty motor oils and transmission fluids. A large portion of this displacement is attributed to stringent emission and fuel economy norms, Kumar pointed out. Group II is significantly used to blend HDMO and PCMO grades, like SAE 15W-40 and 10W-30. Group II also has established a substantial presence in some of the industrial lubricants.

He noted that, due to oversupply of Group II, its prices have headed southwards, making its price competitive in comparison to Group I. Moreover, the logistic and historic cost benefits in using a single base stock increasingly make Group II a preferred choice among blenders.

South America currently appears to be following the North American blend approach, he added, showing preference for Group II base stocks rather than Group III. This is actually reflected in Petrobras plan to set up a new Group II plant in Brazil. Moreover, abundant Group II supply from U.S. will help them pursue this approach.

Casting a look at the worlds Group II suppliers, Kline ranks just nine companies as Group II majors: Chevron, ExxonMobil, Motiva, GS Caltex, the Excel Paralubes joint venture, S-Oil, SK Lubricants, Sinopec and CNOOC. These global companies are all merchant sellers of Group II, and most have strong in-house demand for making finished lubricants as well. Their size and global reach means they also can exercise price leadership in Group Iis.

A second tier of suppliers, including Suncors Petro-Canada unit, Calumet, and Formosa Petrochemicals, have tended to target regional markets. This tier tends to be price followers, but it is quickly adding members, with new capacity due soon from Luberef in Saudi Arabia, Petrobras in Brazil and Shell-Hyundai Oilbank in South Korea, among others.

Smaller players involved in Group II include Hindustan Petroleum, Bharat Petroleum and Indian Oil Corp. (all in India), Malaysias Petronas, Idemitsu in Japan, and Hainan Handi in China. This third tier of suppliers consume their output in their own finished lubricants but often supply the merchant market, too; it includes several rerefiners like Puralube and Lwart as well.

Group III

With average annual growth of more than 10 percent through 2017, Kline expects Group III demand will grow faster than any other base stock category. If the current slate of projects come to fruition, the world could gain another 2.6 million tons of Group III capacity by 2022, the firm observes. Much of that growth will be driven supply push rather than by technical considerations, however.

With new categories like PC-11 [heavy-duty engine oil] and GF-6 [light-duty engine oil] in offing, use of Group III will increase in engine oil formulation, said Kumar. HDMO, which currently uses Group II mainly, will make greater use of Group III in formulations.

To date, Group III base stocks have found little use in industrial applications. High prices and lack of technical demand have ruled them out except for select applications like compressor oils and gear oils for wind turbines.

In Klines view, the growing supply of high-performance base stocks coming on stream – and theres plenty of it coming – will be directed first to the U.S. and European markets, and then towards South Asia, Africa and the Middle East. New Group III supply in the Middle East will represent a challenge for Asian Group III suppliers, as it is expected that a greater portion of Asian Group III production in the future will remain [in Asia].

Klines three reports are Global Lubricants Basestocks: Market Analysis and Assessment, Global Synthetic Lubricants Basestocks: Market Analysis and Assessment, and The Global Business Outlook for Brightstocks.