Recent news has been littered with headlines about the political unrest in various Latin American countries, and lubricant companies are rightfully concerned about the effects this turmoil is having on their bottom lines in the region.
The prognosis for future growth in Venezuela, for example, looks grim. As a result of wild inflation, a fight for the presidency and United States sanctions against the government, the countrys state-owned oil company Petroleos de Venezuela S.A. has taken some major hits. John Price, managing director of Americas Market Intelligence, said in a presentation at the 2019 ICIS Pan American Base Oils & Lubricants conference in Jersey City, New Jersey, that the country has been unable to keep up with base oil production, to finance that production, to get the right [feedstock] blends to make it work. PdVSAs two API Group I base oil plants could produce up to 6,050 barrels per day, according the LubesnGreases 2019 Guide to Global Base Oil Refining.
Most recently, Nynas, the companys joint venture with Finnish refiner Neste, announced that it is in the midst of reorganizing ownership as a way to escape crippling sanctions. This reorganization is expected to result in PdVSA possessing a significantly smaller share of the j.v. Additionally, the companys contract to operate the Isla refinery in Willemstad, Curacao, has expired, and a new operator, the Klesch Group, has been chosen to replace PdVSA. Isla can make 5,000 b/d of Group I oils and 3,700 b/d of naphthenics.
Going forward, Venezuela will still be a problem in terms of its ability to produce, Price predicted.
Accounting for more than 50 percent of the regions lube market, Brazil seems to be faring a bit better than its neighbor. According to Price, a countrys gross domestic product has a fairly reliable correlation with finished lubricant demand. Assuming this to be the case in Brazil, its lubricants market can expect to tag along behind a 2.4 percent increase in GDP in 2020 and 2.5 percent in 2021.
However, Price cautioned that state-owned Petrobras has had problems financing production, evidenced by its announcement in June 2019 that it plans to sell controlling stakes in eight of its refineries-some of which include base oil plants-as a way to tamp down the daunting national debt.
Mexico-with a 22 percent stake in the Latin American market-hasnt been immune to adversity, either. The problem in Mexico, said Price, is its domestic economy. It runs on three pillars: consumption, government spending and private investment.
Consumption in Mexico is fairly lively and doesnt pose a threat to the market right now. But government spending is a different story. Forty percent of expenditures is paid for by oil receipts or taxation of the national oil company, said Price. Without high oil prices, Mexicos economy will languish, and so will lube demand.
Even more concerning to the Mexican market, though, is the lack of private investment in the country, said Price. Mexican-owned companies are being scared off by President Obradors policy decisions. By his count, about 100 billion dollars in Mexican money has left the country as a result.
Fortunately, the United States-Mexico-Canada Agreement is expected to boost Mexicos already booming export economy. According to Mexicos automotive industry association, the country exported more than 2.8 million vehicles from January to October last year, of which more than 2.6 million were sent to the U.S. Naturally, factory fill lubricant demand has benefited.
According to a study done by the national association of lubricants and additives in Mexico (ANELA), approximately 250 lube brands are now available in the country. Daniel Castao of ANELA noted that the country produces around 700,000 tons of lubes per year, which is about a tenth of the U.S. market, two-thirds of the Brazilian market, three times as large as the Argentinian market, and four times the size of the Colombian market.
In line with the rest of Latin America, a majority of the lubricants used in the country goes toward automotive applications. About 10 percent of those automotive lubes did not meet international standards, such as those set by the American Petroleum Institute, said Castao. To address this quality issue, the Mexican government created its own lubricant quality standard, NOM 116-SCFI-2018.
Set to be implemented on June 16 of this year, NOM 116 was developed to increase the formality of the Mexican lubricant market by defining test methods and implementing audits, controls and document review for heavy-duty and passenger car motor oils. The standard was designed to be similar to APIs specifications and utilizes ASTM test methods.
In a region with plenty of potential, Price asked, Why arent lubricants selling more in Latin America? According to LubesnGreases Factbook, Latin America accounts for just 9 percent of global lubricant demand. Most of the large global lube suppliers rely heavily on sales driven by distributors in the region, with the exception of Mexico and Brazil. At the end of the day [distributors] have to make sales, and they arent going to fight the market that much, he said.
For Latin America as a whole, most of lubricant demand is in the automotive sector. The vehicle parc in the region has become newer, mostly due to greater access to credit and increased free trade. Along with this modernization will come a gradual increase in consumption of light-viscosity PCMO.
However, compared to its Northern neighbors, Latin Americas parc is quite old, and Price indicated that the oil change market is overwhelmingly do-it-for-me. Because of this, heavier viscosity grades may hang around for a bit longer than they should, as mechanics tend to stick with the types of oil with which they are familiar.
On the heavy-duty trucking side, we do see a decline in SAE 30 and SAE 40 because they are compliant with old standards of [fuel] Price said. Nonetheless, heavy viscosities continue to be strong in Latin America because the ability of [refiners] to create low-sulfur fuels, particularly diesel, is still not there yet. Vehicles need to carry the right lubricants for that reality.
Looking into the future, one of the most promising high-growth areas is lubricants for motorcycles, Price stated, as they are more affordable than cars and provide a good way to get through Latin Americas notoriously congested traffic.
Demand for lubes associated with mining and agriculture is also expected to grow. Peru, for instance, has significantly opened up both its mining and energy sectors in recent years and has created very industrial-friendly regulations, making it a favorite country for mining investment, he said.
Colombia is another example. When oil and coal prices in the country were high, those two commodities represented almost 80 percent of its exports. That priced the Colombian peso out of the market, such that manufacturers in Colombia simply couldnt compete with imports from the United States and China. He explained that this forced many Colombian manufacturers to close after losing their export markets as well as local business.
However, with the collapse of the peso at the beginning of 2015, the country gained a price advantage of about 55 percent. This caused manufacturers to come back to life in Colombia, servicing first their own clients and then also beginning to service export clients again.
A similar dynamic occurred in Brazil and Mexico, and the Latin American market is now seeing increased investment in infrastructure that drives manufacturing. This could bode well for the lubes market.
Overall, however, the region is looking at growth rates of around 2 percent per year, which Price stated is well below those of other emerging markets.
Touching Base with Base Oils
According to the LubesnGreases 2019 Guide to Global Base Oil Refining, there are 11 base oil plants in Latin America with capacity to produce more than 2.3 million tons per year of base oils. Of that, over 1.9 million tons are Group I, 78,000 tons are Group II and 263,000 tons are naphthenics.
Brazil has the largest capacity for base stock production in the region, with over 35 percent of Latin Americas total capacity. Petrobras leads in Group I, accounting for 34 percent. Mexicos Pemex comes in second, responsible for almost 16 percent of Group I capacity. Brazils rerefiner Lwart is the sole producer of Group II in the region, with a capacity of 1,550 barrels per day.
To make up for the deficit of suitable base oils for much of its lubricant demand, the region makes heavy use of imports-particularly from the U.S., which sent 6.5 million barrels of base oils into Mexico, 2.4 million to Brazil and 3 million to other Latin American countries in the first half of 2019. Much, if not all, of this is Group II.
Production of synthetic base stocks hasnt penetrated the market in Latin America up to this point. According to Price, the region has a track record of failing to absorb new technologies in a timely manner, which helps to explain its lack of Group III, IV and V production.