As the second largest economy in Latin America, Mexico is asserting its role as a sophisticated base oil and lubricants market. With changes in automobile manufacturers engine oil requirements and a growing vehicle fleet, its appetite for advanced lubricants is rising sharply, a recent industry meeting heard.

Carlos Adrian Galeano Guerra, technical and quality control manager for Lubricantes de America (Lubral), gave an overview of the market and its trends during the ICIS Pan American Base Oils & Lubricants Conference, on Dec. 3. Mexico, he said, accounts for one-third of all trade in Latin America, and its network of free-trade agreements – including NAFTA, the North American Free Trade Agreement – gives Mexican businesses easy access to 45 countries and 1.14 billion people. The countrys economic health is closely tied to that of the United States, he pointed out, and is growing at a stable 2 to 3 percent per year, including an expected 2.5 percent in 2015.

The countrys finished lubricants market, Guerra said, saw demand nudge above 1 million metric tons in 2015, of which 304,450 tons were imported and about 700,000 tons were blended in Mexico. Imports of finished products increased by 53 percent between 2010 and 2015. Lubral (which is part of the Gonher Group) attributes this to domestic blenders making different products than what the countrys OEMs demand.

In late 2012, national oil company Petroleos Mexicanos (Pemex) opened the lubricants market to domestic and imported brands in nearly 10,000 gas stations across the country. Stemming from a decision made by Mexicos Federal Competition Commission, this represented almost 3 million liters of lubricant sales, and triggered a competitive stampede.

Imports are a highly fragmented segment, with global brands such as Shell, BP Castrol and others accounting for 65 percent of imported volumes, followed by roughly 10 percent each from independent blenders and original equipment manufacturers. Traders imported about 5 percent, and a variety of other sources market the rest.

Guerra said imports now are dominated by 27 companies, which bring in 80 percent of imported volume. More than 7,500 other companies vie to bring in the other 20 percent.

Three major segments dominate finished lubricant demand in Mexico: passenger car motor oil at 33.6 percent, heavy duty engine oil (26.5 percent) and industrial oil (21.3 percent). While demand for high viscosity PCMO remained relatively steady from 2010 to 2015, demand for monograde oils dropped from 30 percent to 18.2 percent now. Low viscosity, high performance lubes rose from 21.6 percent of the market to a 30.4 percent share in the same time period.

A similar pattern can be seen in the heavy-duty segment. Products meeting API CH-4 and older categories steadily lost ground over the past five years, from 55.3 percent to 46.4 percent, while demand for API CJ-4 has risen by 8.1 percent in the same time period and now claims a quarter of the market. API CI-4 and CI-4 PLUS have also seen a slight increase.

What we see here is the Mexican [automotive] fleet has been changing over time; this is changing the way that we use oil, explained Guerra.

The automotive industry plays an important role both domestically and across Mexicos borders, contributing 15 percent of the countrys manufacturing GDP. Mexico is the eighth largest light vehicle producer in the world and the seventh largest heavy vehicle producer. One of every 10 vehicles sold in the U.S. is made in Mexico, and 19 of the worlds major OEMs have plants in the country – with more (like Kia Motors) on the way.

More than 1.1 million vehicles were sold in Mexico last year. While sales of heavy duty vehicles remained constant, yearly sales of passenger cars have spiked by 40 percent since 2010. More than 27 million passenger cars are traveling Mexicos roads now, a 25 percent increase over 2011. Of those, Guerra said 23 percent were Volkswagen, 23 percent Nissan and 20 percent GM.

The heavy duty fleet totals 10.4 million units, an 11 percent increase over 2011. Paccar (which owns Kenworth and Peterbilt) dominated the fleet with 52 percent of vehicles, followed by Daimler Trucks at 19 percent and Navistars International brand at 17 percent. Volvo/Mack is another significant player, with a 7 percent share.

All the while, the landscape of lubricant distribution channels that serve all of these vehicles has been shifting with the change of the requirements, specifications and needs of the different OEMs, said Guerra. In the case of the independent channels that for a long time had been the biggest part of the business, they have shrunk, he continued. They are still the biggest, but that part is moving to the retail stores where they choose what to sell. The OEMs entered that game, too. They are competing against the lubricant channels.

Last year, independent distribution channels had a 40 percent share of lubricant sales, followed by OEMs and retail/specialized retail at 20 percent each, gas stations at 10 percent, commercial distributors at 6 percent and quick lubes at 4 percent.

As Guerra noted, finished lube volumes are migrating toward specialized retail stores and retail chains. The rules are changing, the economy is changing, so we have to foresee the best way to get products to market, he advised.

Looking at the countrys base oil picture, Guerra estimated demand would reach 648,000 metric tons last year, up from 636,000 in 2014. He noted that Pemex – the sole domestic source of base oil – is poised to revamp its Salamanca refinery to make API Group II, but no one seems to know when that will happen. Salamanca has capacity to produce 6,000 barrels per day of API Group I, and while the company had vowed to offer Group II by 2017, the upgrade project depends on the economy and competing investment priorities, Guerra remarked.

To fill the gap, base oil imports have been flowing steadily. From 2013 to 2015, imports climbed 45 percent to 491,000 metric tons, while Pemexs output shriveled 42 percent to just 157,600 tons (well below its operating capacity).

Right now in Mexico, we use most of the base oil from the United States, said Guerra. Ninety-three percent of the countrys base oil imports came from the U.S. in 2015. From another perspective, Mexico absorbed 16 percent of all U.S. base oil exports in 2014 – confirming that each is its neighbors largest trading partner.

Of the total base oil imports, about 79 percent were paraffinic base oil, 16 percent were naphthenic, and other types made up the rest, a mix that has stayed largely consistent since 2010. Likewise, heavy vis grades still make up over half of the base oil demand in Mexico, but their share has been dropping.

Also in recent years, the share of Group II has jumped, going from 17 percent of imports in 2010 to 24 percent in 2015. Thats taking a sizeable bite out of Group Is share of the imports, which has fallen to 36 percent now, Lubral estimates. Part of this was due to pricing, said Guerra, adding that last year, some cuts of foreign-made Group II were cheaper than Group I produced in Mexico of the same viscosity. If we buy Group I from Pemex, and its more expensive than to buy Group II from the United States – why buy Group I? Guerra mused.

Further evidence of the change in quality: API Group III imports have also spiked, and in 2015 were four times what they were five years before – though they still account for just 2 percent of the arriving barrels. Two percent is not much, Guerra conceded, but it demonstrates that synthetic lubes are getting more and more force. These Group III volumes, he added, are mainly coming in as finished lubricants rather than as stocks for blending.

Imports arrive by two transport methods: highway and (increasingly) railway. As Guerra reminded, The problems in Mexico, as you know, are the cartels on the roads, which endanger truckers and their cargoes. Not only is shipping by rail safer, bulk purchasing is also better facilitated by train.

As yet, he added, not many [blending] facilities are near train spots, and about 90 percent of base oil must travel at least some of the way by truck. But automotive OEMs are building more facilities near train depots – and blenders are sure to follow their lead.