Starting in 1994, she said, the North American Free Trade Agreement brought new opportunities for growing GDP, and both economies are strongly co-dependent now. Thats as true in base oils as in other sectors, she told the Pan American Base Oils & Lubricants Conference on Dec. 4. Suarez directs the base stock and additives business unit of Quimica Delta, one of Mexicos largest chemical distributors.

During third-quarter 2014, Mexicos gross domestic product rose 2.15 percent. That was its best quarterly performance in two years, although the government had hoped for full-year growth to reach 2.3 percent. While that hope had dimmed, at least 2014 is going to be better than 2013, Suarez added. On the other hand, the economy may be in worse shape than GDP figures suggest. According to SENER, Mexicos Department of Energy, fuel demand has wilted since the end of 2012. Some small gains were made last year, but the overall picture is one of weakness since fuel sales tend to be a barometer of industrial activity.

Turning to the spotlight to the lubricants industry, the Quimica Delta executive projected that Mexico would require 4.14 million barrels of base oil by the end of 2014. Of this, 38 percent would be supplied locally – all from state-owned oil company Petroleos de Mexico – and the rest would be imported.

Imports in 2014 will amount to 2.57 million barrels, and of this we estimate 78 percent is paraffinic, 17 percent is naphthenics, and 5 percent are other types, Suarez said. The market still relies a lot on paraffinic base oils. Also, when you consider that Pemex makes only paraffinic stocks, you can see that paraffinics are very significant.

Although output from Pemexs sole base oil refinery in Salamanca, Mexico, sometimes wobbles, it manages to satisfy a steady 37 percent to 38 percent of the countrys base oil market every year. That means, for each kilogram of Pemex base oil sold into the market, 1.6 kilograms must be imported, Suarez said. This balance mainly depends on the markets quality needs, as we are still running on older API specifications and higher engine oil viscosity grades.

Looking more closely at base oil demand by API Group, what we are forecasting is that Group I will turn out to be 65.6 percent of that 4.14 million barrels of demand in 2014, she continued. Group I is a Pemex stronghold, and it supplies 58 percent of the countrys need for this stock. That leaves a clear field for imports to sweep up the remaining market demand for Group I as well as all Group II, III, naphthenics, Group IV (polyalphaolefin) and other types.

Additional forces are in play, too. The currency exchange rate is one factor that affects the volume of imports, Suarez went on. Usually Pemex sells product in pesos. If the exchange rate is running higher, it can become more economical for local blenders to buy from Pemex rather than use costly U.S. dollars to pay for imports.

Another factor is the tightness, or looseness, of supply in the United States: Any time you have an oversupply of material in the United States, the closest backyard to put it is Mexico.

Quimica Delta has been moving product across the U.S.-Mexico border for many years. It was founded in 1974 by Mexican private investors, and is now the third-largest distributor of chemical products in the country, handling 125 million metric tons of material a year and making $200 million in sales. It became ExxonMobils base stock distributor for all of Mexico in December 2013.

The company is headquartered in Teoloyucan, where it has 2 million gallons of liquid storage capacity, blending and loading stations, a drum recycling facility, laboratories, offices and warehouses. It has further storage and distribution sites in Monterrey, Guadalajara, Altamira and Tula.

Suarez said Mexicos blenders are demanding better and more consistent quality in the base oils they buy, to save the time and money that otherwise would be wasted in making corrective reblends. They also are trying to lower their total cost of production. So if any base oil doesnt meet the requirement, blenders are seen as more willing to change suppliers.

Working capital is another concern for local blenders, as they keep a sharper eye on lead times, inventory costs and credit terms. Some are also going after export incentives, because they may get tax benefits if they export their finished lubricants.

Homing in on the qualities of Mexicos imports, Quimica Delta calculates that paraffinics will amount to 2 million barrels in 2014, or three-quarters of what comes in. Twenty-two percent of these paraffinic imports are light-viscosity grades, 24 percent is medium-vis, heavy grades are 39 percent, and 15 percent is bright stock.

Although Mexico draws on many sources for its base oil imports, its no surprise that the United States and Canada far outweigh the others, delivering 91 percent of the inflow. Producers in South America contribute almost 6 percent, while Europe and Asia together supply a bit more than 3 percent.

Group I stocks continue to dominate the market, but Group II has been inching its way up the ladder in recent years. Group II represented 15 percent of imports in 2011, then nudged up to 16 percent in 2012 and 2013, and was on track for a 17 percent share of the imports in 2014.

Generally though, import volumes have been shrinking rather than growing. The most recent peak came in 2010, when the country imported 2.89 million barrels of base oil – but each of the next three years undershot the one before. At last 2014 may have snapped that losing streak, and import volumes by early December seemed poised to hit the 2.6 million barrel mark by years end.

Despite this recent uptick, this market is not growing, asserted Suarez. Its going down, or will be flat at best, should you want to feel positive. In particular, naphthenic base stocks appear to be getting squeezed out of lubricant applications. They were 22 percent of the imports in 2009, but have been ceding market share ever since. Meanwhile types including Group II and Group III and various synthetics have been ascendant.

Pemex remains a key player in Mexicos paraffinic base oil market, and any strategic action on Pemexs part will have an impact on the whole balance of the market, she continued. Overall, Mexicos base oil market is not growing, but the environment has become really, really competitive over the last years. We do expect the demand for Group II will grow in the next two years, as the global offer of volumes grows. It may replace some Group I from Pemex.

Although the market is moving toward lighter weight oils, Mexicos drivers normally prefer to use higher viscosities than the SAE 5W-20 and 5W-30 that dominate the U.S. engine oil marketplace; even monogrades are still popular in Mexico. However, these higher vis grades require heavy-vis base oils and bright stocks, which are in dwindling supply, Suarez noted, and there is no investment being made in these worldwide.

Although long-term prospects are brightening, Mexicos present mood is one of apprehension, Suarez indicated. Major fiscal and energy reforms were signed into law last year by President Enrique Pea Nieto, one of which ended Pemexs 74-year monopoly on the countrys oil and gas sector and opened the door to private and foreign investors. Many are excitedly diving into oil and gas exploration and development – but the country also needs to upgrade its underperforming refineries.

We are waiting to see what will happen. At this point, we cannot anticipate much change yet. The energy reforms will bring a period of uncertainty until new stakeholders have settled down and settled in place.

Quimica Delta believes that a more competitive environment will emerge, but not within the next six months. The country is struggling with poverty and crime, and if the social environment is unstable we will not have the confidence of foreign investors, Suarez said. The key will be political and economic changes.

In conclusion, she reiterated, Energy reform will have an impact, we just cant say how. It may depend on how and where Pemex invests its capital. They may invest in lubricants and base oils, or they may invest elsewhere.

Either way, were going to see an effect on the balance of the import/export supply.