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September 7, 2016

Volume 17 Issue 52

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Challenges Ahead for Brazilian Market

Several key trends in the lubricants and base oils industry as well as a slowing local economy are causing the Brazilian market to experience a decline in demand, and producers, suppliers and distributors will have to make adjustments, an official from consultancy LubeKem forecast.

Claudio Pereira, director of São Paulo-based LubeKem, said demand for finished lubricants in Brazil declined by 11 percent between 2013 and 2015, from 1.4 million metric tons per year to 1.2 million t/y. Pereira spoke at the Aug. 17-18 Lubgrax conference in São Paulo, organized by Sell & Comm and Argus Media.

He forecast that this trend will continue in 2016, with lubricant demand dropping by up to 10 percent to 1.1 million t/y due to a stagnant economy in the country, but also higher-quality base stocks and lubricants that lead to increased fuel economy.

Standards

The improvement to fuel economy in global markets has also influenced Brazil, he noted, with the country’s National Agency of Petroleum, Natural Gas and Biofuels (ANP in Portuguese) adopting Regulation No. 22 in April 2014 to establish the minimum quality levels for automotive lubricants in Brazil for purposes of registration, marketing, production or import.

As of January 2015, motor oils in Brazil must meet service categories API SJ for gasoline engines and API CG-4 for diesel engines or current European Automobile Manufacturers’ Association (ACEA) standards. In January 2017, the minimum requirements will be API SL in gasoline engines and CH-4 in diesel engines.

“No doubt the quality of lubricating oils is increasing, but their control and inspection continue showing serious problems in Brazil,” said Pereira, although he added in a follow-up phone interview that ANP last year adopted a new system for quality control of lubricants “to crosscheck all the information from producers of lubricants, suppliers of raw materials and suppliers of rerefined base oils.”

Additionally, Brazil experienced a drop in sales of automobiles – passenger cars, commercial light motor vehicles, trucks and buses – of 45 percent to about 2.1 million in the 2013-2016 period, and a 43 percent decline of motorcycle sales to about 900,000 for the same timeframe. This has had a negative impact on the Brazilian automotive lubricants market, which represents around 70 percent of total demand in the country, said Pereira.

“For 2016 it's expected the operating rate of the automotive industry will be around 40 percent, and it seems there's no easy growth solutions on both sales in the domestic market and exports,” Pereira indicated.

Industrial production in Brazil has also been on the decline, with LubeKem noting a 16.4 percent reduction between 2011-2016. “The fall in industrial production does not only contribute to reduce the demand for lubricants in the short term, and may have an even more harmful effect in the future because it has been followed by the closure of factories and reduction in investments,” he explained.

Despite the ongoing economic woes in Brazil, Pereira says that LubeKem sees good opportunities in the lubricants market in supplying products for agricultural, mining, food processing, cosmetics and pharmaceutical applications, and encouraged industry players to think of new strategies and models to increase profit independently of demand growth. “It's fundamental to reevaluate the whole value chain of each company, including the [local and international] suppliers and the sales channels – end-users, distributors, resellers – in order to double-check the competitiveness of the value chain in the short, mid- and long term.”

Base Oil

The Brazilian base oils market has also been affected by global trends such as oversupply of high-quality stocks, a slowdown in demand, shutdowns of API Group I plants, high volatility of crude oil prices, increasing pressure of quality in base oils and new environmental regulations. “Particularly in Brazil the economic-political crisis which resulted in Dilma Rousseff's impeachment and the corruption scandal at Petrobras created some additional hurdles for our market, due to the importance of Petrobras in Brazil's GDP growth,” Pereira added.

Base oil production in Brazil is mostly limited to Group I, he said. State-owned Petrobras produces virgin Group I at its facilities in Duque de Caxias and Mataripe, and naphthenics at its plant in Fortaleza. The country has more than 10 Group I rerefiners, with rerefiner Lwart the sole Group II producer.

A few years ago, Petrobras announced it wanted to build a Group II plant with capacity to produce 400,000 t/y, but cancelled the project in July, according to Pereira. “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.”

Brazil is a big importer of base oils, however, with 441,000 tons of all base oil grades imported last year, Pereira noted. Although he expects base imports to lower to 380,000 tons in 2016, “the 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.”