Group II, III March Forward

Demand for API Group I base stock in lubricants is expected to continue to decline through 2026, gradually superseded by Group II and III in automotive applications but remaining popular in industrial applications, according to Kline & Co.

The Parsippany, New Jersey-based consultancy estimated global demand for lubricant base stocks at 35.5 million tons in 2016.

However, Group I is expected to retain its market position in industrial applications, especially in the high-viscosity range, where there are no economic substitutes available to sub for Group I, Anuj Kumar, a project manager in Klines energy practice, said during an online presentation July 25. What works in favor of Group I in some of the applications is its high solubility, as well as its high viscosity, which can be made available using naphthenic, but [naphthenics] have a lower viscosity index compared to Group I. He noted that Kline has observed some base stock suppliers looking at naphthenic as an alternative to Group I.

He noted Group I still accounts for close to half of base stock demand for use in lubricants, particularly for uses such as low-tier automotive lubes and for the industrial segment. Group II is fast catching up as a mainstream alternative, Kumar said, and accounted for about a third of the base stock demand for lubricants in 2016. Naphthenics remained a niche product segment among lubricant base stocks, consumed primarily in greases, metalworking fluids, transformer oils and rubber process oils, he noted, with about a 10 percent share.

Kumar said that despite the slow projected growth for finished lubricants, there continues to be

strong demand for setting up new base stock capacity, especially on the Group II side, with announced projects that would add up to 4.5 to 5 million tons of new Group II and III capacity. We expect a lot of new Group II plants to be set up, chiefly in Russia, some of them in Europe, some of them in Asia-Pacific, and in the Middle East region, he said. He noted a few new plants in China will add Group III capacity there.

With finished lubricant demand growing slower than base stock supply, he said, some base stock plants will need to be shuttered. Kline estimates about 4 to 4.5 million tons of base stock capacity has to be rationalized over the next 10 years so as to make the base stocks operation sustainable at least on a global level, so the that the average market rates are sustainable in the long term, he concluded, noting most of that would be expected to be Group I.

Kline found a surplus of about 7 to 8 percent of base stocks across all types in 2016. A minor part of that is accounted for by non-lubricant applications for base stocks, he said, such as drilling fluids.

Kumar said the supply-demand balance picture hides the growing shortage of high viscosity base stocks. Lately there has been some capacity additions for bright stocks, but nonetheless the market is more or less balanced or tight for heavier grades, Kumar said.

Kline found a surplus of Group I capacity, though supply is close to balanced with demand. The balanced market is due to Group I producers only producing as much as they can sell, Kumar explained.

Naphthenic supply and demand in 2016 was very evenly balanced. Its similar to Group I, in that suppliers only produce as much base stocks as they can sell, he said. This hides the picture – when you look at the market at various viscosity grades – that there is a growing shortage, or tight situation, for high-viscosity base stocks or even bright stocks.

On the other hand, he said, a significant surplus exists for Group II and to a lesser extent Group III base stocks, especially on the lighter end. The surplus essentially causes a supply push by refiners to substitute Group II and III bases stocks for Group I in applications despite a lack of technical demand.

Kumar predicted that Group II demand growth out to 2026 will largely be driven by formulation changes more than growth in finished lubricant demand. This shift will be driven by changing technical requirements, Kumar said. An example will be the move from monograde heavy-duty motor oils to grades such as 15W and 10W.

As the surplus of Group II and Group III increases in markets like Asia-Pacific, Africa and Middle East, there will be a lot of Group III [demand] driven by formulations, as well, he noted.

Kline doesnt project Group III capacity to grow much out to 2026, he said, explaining that the firm expects capacity creep due to catalyst and processing improvements or upgrades of Group II rerefineries, such as those seen recently by Puraglobe and Avista Oil. This capacity is sufficient enough to cater to the demand for Group III over the next 10 years, he said.

Group III has a very high demand growth rate, he said, driven by the fact that theres a strong pull for its use in synthetic lubricants. Demand for Group III in North America and Europe will be driven by technical demand, and [in] markets like Asia-Pacific – where Group III is abundant and available – it is expected that demand growth will be a function of technical demand and as well as availability, he said.

The study is titled, Global Lubricant Base Stocks: Market Analysis and Opportunities (2016 to 2026).