South America Plods toward Recovery


Years of stagnant economic growth and political instability in South America have led finished lubricant and base oil demand to drop. The recent ousting of left-leaning politicians for pro-market successors seems to indicate better prospects for the region, industry experts noted, although the pace of recovery will be different in each country.

The International Monetary Fund projected gross domestic product for the region to shrink around 1 percent in 2016 after stagnating in 2015. Brazil, the regions most populous country and source of 50 percent of its GDP, has been hit particularly hard, noted Sergio Rebelo of Sao Paulo-based consulting firm Factor de Solucao.

The country was struck by a perfect storm: a reduction in commodity prices brought on by Chinas economic slowdown; the exhaustion of growth based on fiscal expansion, leading to unsustainably high debt; and the United States raising taxes on Brazilian products, Rebelo told the ICIS Pan American Base Oils and Lubricants Conference in Jersey City, New Jersey, in December.

As a result, Brazils GDP contracted by 7 percent in 2016, and lubricant sales went down an estimated 6.5 percent during a year riddled with a corruption scandal involving government officials and state-owned oil company Petrobras, along with the impeachment of former President Dilma Rousseff. The political instability in Brazil has contributed to the economic crisis even more, Rebelo said.

According to data from Factor, Parsippany, New Jersey-based Kline & Co.s affiliate in South America, Brazils situation has affected the regions lubricant market as a whole, which declined at a compound annual rate of 2.6 percent between 2014 and 2016 after growing an average of 3.5 percent per year from 2009 to 2013. Finished lube sales volumes in the region decreased 15 percent last year, Rebelo stated.

The outlook for the continent in the coming years is positive, but uneven. Rebelo said that Brazil and Argentina, the two biggest markets, will recover at a slower pace than Chile, Peru and Paraguay. Both countries are not investing as far as the public accounts are concerned, they deal with high inflation rates, high unemployment rates and very high debt-to-GDP ratios. Under this equation, it is not expected that we will see growth.

Automotive Lubes Dominate

Demand for finished lubricants in South America was estimated at 2.4 million metric tons in 2015, according to Factor-Kline, a drop of approximately 100,000 tons compared to the year before. Sixty-two percent of lubes consumed were automotive, with heavy-duty diesel engine oils leading over passenger car and motorcycle oils. And despite its financial and political troubles, Brazil consumed over half of the continents lubricants, followed by Argentina, Chile, Colombia, Ecuador and Peru.

One bright spot is the continued penetration of synthetic and semi-synthetic lubricants into the Brazilian market, with around 110,000 tons consumed in 2015, 70,000 of those in passenger cars. Separate Factor-Kline data indicated that commercial vehicle fleets consumed just under 15,000 tons of synthetic heavy duty motor oil that year as the sector continued to slowly shift away from mineral oils.

By 2020, the country is expected to consume 150,000 tons of synthetic and semi-synthetic lubes, including 110,000 tons of PCMO and around 24,000 tons of HDMO.

The synthetics and semi-synthetics market will be 5 to 7 percent higher than conventional products in South America in the next three years, driven by modernized car engines requiring lower-viscosity PCMO grades, Rebelo noted. SAE 0W, 5W and 10W grades represented 17 percent of South Americas PCMO consumption in 2015, excluding motorcycle oils. By 2020, that share is expected to reach 25 percent.

In Brazil, 54 percent of the current passenger car fleet uses mineral oil-based lubes, but 88 percent of new vehicles in the market are using synthetics or semi-synthetics, Moove CEO Ricardo Mussa told attendees. Even though we have a crisis, the renewal of the fleet continues, and the consumption of synthetics is increasing.

Indeed, original equipment manufacturers in the region are catching up with international trends toward smaller engine designs, reduced emissions and increased fuel economy, pushed forward both by regulations and government incentives in manufacturing.

In Brazil and in Argentina, which are the hubs of production of the automotive segment in South America, all the major trends that you see in engines and vehicles all over the world are or will be available across most of the models being produced in the region, Rebelo pointed out.

The low motorization rate in the region compared to North America, Europe and Asia, and higher interest of young South Americans in owning cars compared to other regions, are also creating potential demand growth for automotive lubricants. This potential was the reason that made so many automotive OEMs invest in Brazil and in Argentina alone in the last few years, and it includes newcomers as well as modernization of plants that were already in place, Rebelo added.

Base Oil Production Lulls

South America has 10 base oil plants with combined capacity of just under 2 million metric tons per year. About 1.6 million t/y is API Group I, according to LubesnGreases 2016 Global Guide to Base Oil Refining. The continent also relies on imported base stocks, with around 365,000 t/y of Group I coming from Europe and approximately 1.3 million t/y of Group II from the U.S., said Rebelo.

Petrobras produces 43 percent of base stocks in Brazil, operating three base oil plants-two Group I and one naphthenic-with total capacity of 743,000 t/y. Seventeen percent of base oils consumed in the country are rerefined, said Mussa.

Brazil is a large buyer of base oils, with 40 percent of consumption based on imports, he added. Claudio Pereira, director of Sao Paulo-based consultancy LubeKem, said that Brazil imported 441,000 tons of base oils in 2015, and added that imports are expected to be huge in the next few years, but with an ongoing replacement of Group I imports by Group II and III imports due to the increase of lubricants quality in Brazil.

As such, local production of base stocks in the country is not expected to increase. Petrobras announced a few years ago that it wanted to build a Group II plant with capacity to produce 400,000 t/y, but it cancelled the project in July, Pereira said. Due to the low price premiums between Group I and Group II and also due to the global oversupply of high quality base oils, a project for a new Group II plant, at least in terms of return on invested capital, seems to make no sense for the coming years in Brazil.

Rebelo concurred, saying that Factor-Kline does not expect more base stock capacity to be added in Brazil during the next five years. This is not something that the region should be concerned about, considering the surplus of Group II and Group III around the world, he stated.

In Brazil, imports of API Group II and Group III add up to around 250,000 t/y, and Mussa expects that within three years they will reach the same amount as Group I, which will make it harder for producers like Petrobras to find end-user markets that are Group I friendly. Group III market share in the country is slated to grow between 13 and 14 percent per year through 2020 thanks to fleet renewal and the shrinking premium between Group II and Group III, he added.

A Look Beyond

Several trends are shaping the lubricants market in South America, most notably regulations on fuel economy, carbon dioxide emissions and lube quality. In January, Brazils National Agency of Petroleum, Natural Gas and Biofuels raised the minimum performance levels for lubricants sold in the country to API SL, API CH-4 or corresponding international standards.

This was done in an effort to reduce the occurrence of inadequate engine lubrication caused by consumers choosing a substandard product, the agency noted, and to lower consumption by using higher quality engine oils to extend drain intervals.

The lineup of players in the lubricants market is evolving as well. Ipiranga and Chevron Brazil entered a joint venture in August to produce and distribute lubricants, greases and additives by combining their blending operations in the country. This development makes Moove (formerly Cosan Lubricants), Petrobras and the Chevron-Ipiranga j.v. account for roughly 65 to 70 percent of the Brazilian market, said Mussa.

That same month, Petrobras divested its lubricant assets in Argentina and Chile, including blend plants in both countries, after also divesting in Colombia and Ecuador. Petrobras is also looking for a partner for their downstream business, including the lubricants, and eventually may even consider splitting its lubricants business, said Rebelo.

Shell announced in September that it was reviewing the possible sale of its downstream assets in Argentina, including one of the countrys largest lubricant businesses and a base oil plant in Buenos Aires, in an effort to raise $30 billion through divestments. And in November, Chiles Copec signed an agreement withExxonMobilto blend and distribute Mobil-brandedlubricants in Colombia, Ecuador and Peru.

We will have much fewer lubricant producers, but much stronger ones in the region, mainly in Brazil. I believe that in three to five years, we will probably have four groups accounting for 75 percent of the finished lubricants market in Brazil, noted Factor-Klines Rebelo. It will certainly put a lot of pressure on companies that are not the consolidators as well as companies that are within other parts of the value chain.

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Region    South America