This observation could raise some suspicion of inconsistency. How could lubricants demand be so strong, if Brazils economy clearly lacked upward momentum? However, looking more deeply into the current composition of Brazilian GDP, we can notice that services are responsible for 68.5 percent, industry contributes 26.3 percent, and agriculture carries only 5.2 percent. So when record levels of production occur in plants which manufacture vehicles (up 10 percent) and agricultural machines (up more than 20 percent), as was observed last year, the impact might not carry too much weight in the national GDP. In terms of lubricants demand though, these figures obviously cause a great impact.

Additionally, Brazil has initiated and launched significant infrastructure works, to be prepared for the sports events that are coming – the Soccer World Cup in 2014 and Olympic Games in 2016 – and this also led to an increase in the lubes demand.

According to the latest research done by the Rio de Janeiro-based consultancy Agencia Virtual, which specializes in lubricants and publishes Lubes em Foco Magazine in a partnership with IBP (the Brazilian Petroleum, Gas and Biofuels Institute), the total demand for finished lubricants was 1.37 million metric tons in 2013. This maintains Brazil among the six biggest lubricant markets in the world, with a great improvement in quality as well. The vehicle fleet is expanding and renewing itself at an unbelievable speed, and grew 123 percent over the last 10 years, while the countrys population has just reached an 11 percent growth in the same period. If we consider only the motorcycle fleet, we see impressive growth of 300 percent in this period.

Considering this scenario, the National Petroleum, Natural Gas and Biofuels Agency, known as ANP, just published on April 14 new rules governing the minimum performance of engine oils marketed in Brazil. ANP also has established a time frame to introduce them into the market.

Beginning on Jan. 1, 2015, the minimum performance allowed for motor oils will be API SJ or ACEA 2012 for Otto engines, which in Brazil may use gasoline, ethanol or natural gas fuels; and API CG-4 or ACEA 2012 for diesel engines. What is more, oil companies will not be authorized to produce or import lower-tier API SF and CF products. The existing stock can be sold until June 2015.

In a second phase, beginning Jan. 1, 2017, the minimum performance targets will be raised to API SL and API CH-4 or the current ACEA level for motor oil production. The existing stock can be sold until June 2017.

All these figures lead to an expectation of a higher demand for high quality products; in other words, much more API Group II and Group III base oils will be required and imported, since Brazilian refineries as yet produce only Group I.

According to research by Agencia Virtual, the Brazilian base oil market had an impressive performance in 2013, growing 11.1 percent over the year before and reaching 1.34 million tons. The continuous growth of this market is not being accompanied by investments in new refineries or even in new production units in old refineries, however. Local base oil production was around 620,000 metric tons, which represents a little more than 46 percent of the total countrys need last year.

The only native base oil refiner is the state-controlled Petrobras, which makes API Group I base oil at Mataripe (capacity: 1,750 barrels per day) and Duque de Caxias (11,200 b/d); it also makes some naphthenics at Fortaleza (1,300 b/d).

The latest Petrobras strategic plan does not address any investment to produce Group II or III base oils. The only project on the horizon is the Comperj refinery in Rio de Janeiro. Announced by Petrobras about three years ago, Comperj is supposed to have capacity to produce 6,000 barrels a day of Group II in 2016, but the project is not running at the expected speed and probably will not meet that target date.

Meanwhile, to meet the growing appetite for base oils, Brazil had to import 541,000 tons of all API Groups, which means about 40 percent of its need in 2013 was imported, for a volume growth of about 7.8 percent over 2012.

More than half of the volume of base oil imported by Brazil (58 percent) came from the United States, but Italy with 15 percent and South Korea with 11 percent have also played important roles in this segment. Other countries like France, Finland, Malaysia, Sweden, Netherlands, Bahrain, Qatar and Israel have participated with smaller percentages. (A more complete study about this subject is being prepared by Agencia Virtual, in order to supply answers to the numerous players that need more information.)

The rerefining industry is also playing an important role in the base oil market. Rerefiners supplied around 268,000 tons of base oil in 2013, showing an increase of 8.4 percent over 2012. This is a segment with only 19 registered players, all producing only Group I, with one exception: Lwart Lubrificantes. Lwart built a rerefinery in the state of So Paulo to produce 90,000 tons per year (2,500 b/d) of Group II, and commissioned it in late 2012, but it is not running at full capacity yet.

One cannot say that life is easy for Brazilian rerefiners, because a lot of challenges arose in the area of used oil collection, which is crucial for their financial health. Despite a law that obliges Brazils lubricant producers to collect a minimum percentage of used oil for each region where they have marketing activities, and then to redirect it all to the rerefining industry, there are situations and price conditions that tempt end users to divert their used oil to other purposes – like burning, for instance. This illegal trade circumvents the proper collection of used lubricants, and consequently, rerefiners receive a lower volume of raw material than they expected. There is a hope in the market that, with proper inspection and enforcement activities, this situation should improve, and base oil production from the rerefining industry will increase in the future.

Despite its growing appetite for lubricants in 2013, and confirming its out-of-the-ordinary behavior, Brazil exported about 62,000 tons of base oils to many countries in South America and Africa. Most interesting is that 25 percent of this volume was sold to the United States, shipped in parcels that found willing buyers on the U.S. Gulf Coast. For sure, this is a trade exchange that will be worth watching closely in the future.

Turning to focus on the finished lubricants market, we see that ANP now has 134 registered producers in its files – about 10 percent fewer than two years ago. One reason for this is the more stringent regulations in place now for producers in Brazil. In order to stay in business, producers must comply with ANP rules governing imports and exports, used oil management, product quality, blending plant operations, laboratories, storage facilities, social capital and more. Unless there is some flexibility and tolerance with the timing of compliance, to adjust their facilities and investments, the number of producers probably will be even lower in the near future.

In terms of market share, we can find some interesting figures, showing that almost 82 percent of all lubricating oils marketed in Brazil are in the hands of nine companies. These companies belong to the National Corporate Union of Lubes and Fuels Distributors, the so-called Sindicom. By company and market share, the largest are Petrobras, the leader with 20.5 percent, followed by Ipiranga with 13.7 percent, and Mobil (Cosan) with 13.4 percent.

The year 2014 will bring new challenges and opportunities to the industry players. Notably, a number of holidays will be added to the calendar by the Soccer World Cup period – that national passion – and all the election activities in order to choose a new president, senators, governors and members of the Chamber of Deputies, all at once in October.

There also will be some opposing driving forces that may stimulate and discourage investments and inflation at the same time, as well as personal consumption and industry production. At this point it doesnt appear that GDP will grow any more than last year, but public-sector spending certainly will. Social claims are expected to continue to worry the government authorities and some public demonstrations will probably show this unrest to the world.

Nevertheless, Brazils petroleum industry is reaching high levels of production, the agricultural sector is breaking records, and the countrys vehicle manufacturing industry is one of the most stable and productive in the world, bringing more international players to the market. All these factors have made the difference when we talk about the lubricants business.

Brazil continues to be big, complex and growing, even in a very challenging international scenario. In spite of still having to climb a very high mountain that lies in the way to real, sustainable and corruption-free development, the country is maintaining its democracy with good political and economic stability and providing clear rules for the markets. These are very good tools for a hard job.

The lubes market has been winning its battles to date, and we hope it will continue to do so for a long time.

Pedro Nelson Belmiro is a principal with the consultancy Agencia Virtual, and coordinator of the Lubricants Committee of the Brazilian Petroleum, Gas and Biofuels Institute (IBP). A chemical engineer with an MBA in Petroleum Industry Management, he has 40 years of lubricants industry experience, and has held management positions with Esso, Chevron Oronite and Afton Chemical. He also acts as editor for Lubes em Foco magazine. E-mail: pnbelmiro@gmail.com