Base stock choices for lubricants continue to grow, providing significant formulation options for marketers while contributing to a competitive marketplace. On the surface, this appears to be great for consumers and marketers. Given that base oil capacity currently exceeds demand, this wide availability helps to supply quality lubricants at a reasonable price.
But the complete story is more complex, as there are many hidden costs that may not be obvious to marketers, consumers and other stakeholders. Original equipment manufacturers continue to demand products that are higher quality and tailored to very specific hardware needs. As a result, the cost to develop these lubricants and to qualify base stocks and formulations continues to escalate, with many programs exceeding seven figures-not counting the resources, development and capital cost. Not all base stocks are created equal, from both performance and scale viewpoints, and despite rules that allow interchangeability, there is no free ride to qualify each new base stock.
LubesnGreases asked additive maker Lubrizol about the growing number of marketers of API Group II and Group III base stocks. Mike Boyer, global commercial manager for base oils, noted that, In the past, there was an expectation that additive companies would (and did) cover the cost of whatever testing was required to support a given performance claim, particularly in North America where there was little or no requirement to carry any additional performance claims other than API or ILSAC.
Additive companies could limit required testing through the use of base oil interchange, viscosity grade read-across and single technology matrix rules, he continued. To a certain extent, this validated the base oil manufacturers view that costs should be borne by the additive company.
However, in recent years, the cost of developing additive chemistry for the North American market has increased considerably, not only in terms of more stringent performance requirements but also in the number of tests and the introduction of additional OEM-specific requirements, said Boyer. To get to the point where additive companies can apply BOI, VGRA and STM guidelines requires multi-million-dollar investments, and using that data to support approvals for numerous base stocks does not necessarily result in a return on that investment. In other words, additive companies sell no more of their own products whether they have one base stock approved or 100.
In addition, not all OEMs recognize these industry guidelines, resulting in many tests still having to be repeated in different base stocks, Boyer pointed out.
Lubricant marketers and additive companies are expected to deal with every viscosity grade-even if the volumes are small-and this has also caused base stock slates to expand over time. These wider slates include base stock cuts known as Group II+ and Group III+, which are not official API classifications but terminology used to describe base stocks with higher viscosity indices than a typical API Group II or Group III oil.
These cuts are used to produce lower-viscosity oils meeting stringent Noack volatility requirements. And, in the case of Group II+, certain performance parameters can be met while still taking advantage of more lenient BOI and VGRA rules that exist for Group II oils. Boyer observed, These options create value for the base oil manufacturer and our customers. There are clear indications in the market that base oils that carry the broadest approvals have a greater value than those that dont.
Most observers only consider the cost of engine tests and underappreciate the growing impact of blend studies, bench chemical tests and physical properties tests. If you take the case of a typical top-tier heavy-duty lubricant marketed in Europe, for example, it will carry as many as a dozen or so industry and OEM performance claims, each very often having its own unique bench test requirements, Boyer observed.
The cost of bench testing for these kinds of formulations is significant and doesnt include the skillset and considerable number of man hours required to compile and validate the results into performance claim forms, he said. Bench testing alone can cost $20,000-$25,000 on one formulation, and the additive industry spends many millions of dollars in bench testing alone to qualify customers products.
The significance and complexity of formal approvals varies by region, said Beth Fields, vice president of sales in the Americas for SK Lubricants. For example, there is a high barrier of entry in Europe due to the breadth of OEM-specific approvals, while in the Americas region, new entrants can achieve initial market penetration with a few high-volume approvals such as GM Dexos, ILSAC GF-6 or trim stock applications.
With limited approvals, a new supplier still faces challenges, Fields continued. For example, many lubricant manufacturers cannot carry an endless array of Group III base oils at their blend sites due to tank constraints. Companies need operational efficiency and thus benefit from base oils with the broadest approval coverage to support their product portfolio.
In other words, supplier X will likely gain little traction from one to two OEM approvals if a blenders product portfolio requires 10 to 20 approvals from its Group III base oil, she noted.
Boyer observed that additive companies will choose to work with base oil producers that have the greatest market penetration and global reach. Very often, near maximum market penetration can be achieved by supporting two or three of the major base oil producers, he said.
Base oil marketers vary in size, and this allows some to command more value for their base stocks than others. Production volumes that can serve more and larger markets increase the value of the approvals a big producer carries over those of smaller, regional marketers. This is especially true when it comes to more complex and costly OEM approvals.
Such approvals go well beyond API and ACEA specifications to fit-for-purpose products that command more value in the marketplace. Some of the highest-tier light-duty gasoline OEM approvals, such as those for Volkswagen, Daimler, BMW and GM, may only be held by a handful of base stocks and are generally unaffordable for smaller producers that would have a much smaller return for the same investment.
The same applies to heavy-duty approvals, which in most cases require testing well beyond standard API and ACEA regimens. At the surface level, yes, API CK-4 and FA-4 specifications do offer some latitude in base oil read across, said Boyer. The main engine test defining that is the Volvo/Mack T13 oxidation test, which allows flexibility in Group II coverage. However, there are a few dynamics that confound this.
Lighter viscosity grades, including SAE 5W-30, are gaining ground in the heavy-duty market, and these often require a higher percentage of API Group III base oil. Without BOI and VGRA rules, formulators do not have as much flexibility in producing the API CK-4 and FA-4 oils that contain more Group III, he explained.
So, while largely still a Group II SAE 15W-40 market, our [heavy-duty] customers will want to have a complete portfolio consisting of those lighter, more fuel-efficient grades, the complexity of which causes the additive community much higher base oil approval costs.
Furthermore, it is rare in practice that a marketer would have heavy-duty lubricants carrying only the baseline API performance. When you add additional performance claims, such as Daimler MB or Volvo VDS, the barrier to base oil read-across becomes much higher as we get into package approval and more costly test matrix requirements, Boyer added. This dynamic applies for all the relevant viscosity grades and impacts Group II and Group III formulations alike.
A base stock with more formal approvals can command as much as a $150 per ton premium. According to Joe Rousmaniere of base oil marketer Chemlube International, Many items impact pricing, but the key one concerns product approvals. If a marketer has the right approvals-and approvals others do not have-a premium is justified. Rousmaniere has worked with several start-up Group III producers over the past 25 years, including SK, Adnoc and Petronas.
Dependability can also earn a higher price. A supplier that has demonstrated that they are reliable in terms of on-time delivery and consistent quality can command a premium, he added. I also believe that as specifications move more and more to even lower-viscosity lubricants, having higher V.I. offerings as part of your portfolio also provides a strategic advantage whose value can be captured in the price of the base stock.
Low-viscosity lubricants will continue to gain market share. SGH Consulting estimates that by 2030, SAE 0W-XX products will represent about 35 percent of all passenger car engine oils sold around the world. Demand will also grow for lower-viscosity heavy-duty oils, though at a slower rate.
These applications will require ever more Group III and higher-viscosity index base stocks. New applications calling for even thinner oils than SAE 0W-16 will require Group III+ or polyalphaolefin just to meet Noack volatility and basic formulation requirements.
SKs Fields doesnt foresee any problems for blenders sourcing these oils. SK has always anticipated the industrys Group III demand growth and expanded capacity in advance of the markets need, she stated. Higher-quality base oils play a key role in achieving our industrys trending needs such as lighter viscosity oils, fuel economy and lower emissions. Industry players recognize the growing importance of these oils, so new Group III producers are emerging globally, which should prevent any near-term supply shortage caused by increasing demand.
As lower-viscosity finished lubricants become more mainstream, additive companies will need to work with other industry players to advance tools such as base oil interchange, viscosity grade read-across and single technology matrix.
Group III interchange could benefit the industry by allowing better base stock coverage and more flexibility for formulators, noted Rousmaniere. Smaller players and new Group III producers would also be pleased by a somewhat smoother path into the market, especially for more conventional applications. Obviously whatever happens, it will have to make business sense for the industry as a whole.
According to Fields, SK considers the main motives for Group III interchange to be reduced costs and increased flexibility. SK, however, believes there are too many variances in Group III base oils to categorize them as equal performers. There are vast differences in feedstock, hydrocracking process, viscosity index, volatility, saturates and other attributes.
Furthermore, current BOI guidelines in the U.S. and Europe only apply to claims against the API/ACEA sequences; then it is up to individual OEMs to decide whether to accept these guidelines or require additional performance tests, making BOI difficult and impractical, she continued. As our industrys technical requirements become more stringent, lubricant performance and integrity shouldnt be compromised for cost savings and efficiency.
Many stakeholders may be hoping for a compromise to address increasing costs. We expect that, in the near future, lubricant development programs will be run in commercial partnerships between additive companies and those base oil manufacturers that are prepared to share the value created [by approvals] in a fair and equitable manner, said Boyer. z
Steve Haffner is president of SGH Consulting LLC. He has over 40 years of experience in the chemical industry, primarily with Exxon Chemicals Paramins and Infineum USA. He specializes in engine oil formulation and marketing. Contact him at firstname.lastname@example.org or 908-672-8012.