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October 5, 2016

Volume 17 Issue 52

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Group III Growth Continues

API Group III base stock demand is expected to grow fastest through 2025, spurred by supply surplus and technical considerations, while Group I currently retains the largest demand share of the global base oil market, according to Kline & Co.

Parsippany, N.J.-based consultancy Kline estimated global demand for lubricant base stocks in 2015 – including Group I, II, III and naphthenics – at 36 million metric tons.

“Despite continued reduction in market share, Group I is still the biggest segment in terms of volumetric demand across the world,” Anuj Kumar, a project manager in Kline’s energy practice, said during an online presentation Sept. 21. “Group I accounted for just under half of the total base stock demand in 2015.”

Kumar noted the market for Group I is impacted by a variety of changes driven by stringent technical requirements and excess supply of other base stocks like Group II and Group III. “The stricter Noack [volatility] requirements in U.S. standards for engine oils makes it increasingly difficult to use Group I.”

Kline estimated Group II represented more than a quarter of the global demand for base stocks, followed by naphthenic, and Group III base stocks.

Based on announcements, Kline expects about 7.5 million tons of additional global base stock capacity – Group II and III, and naphthenic – will be added from 2015 to 2025. According to the company, this would imply a rationalization of about 5.5 to 6 million tons of base stock capacity – most of which will be Group I, along with naphthenics – to ensure minimum sustainable global operating rates.

On a regional level, the base stock supply picture differs in each region. “For example, North America has a surplus of Group II, but has a deficit of Group III,” Kumar said. “Europe has a surplus of Group I, but has a deficit of Group II and Group III.”

Meanwhile, the Asia-Pacific region has a Group I deficit, but a surplus of both Group II and Group III. “The surplus Group III is exported to various regions, but Group II surplus is directed towards Group I substitution,” Kumar said.

About 8.3 percent, or 3 million tons, of the 36 million tons of global demand for base stocks is used to blend synthetic and semi-synthetic lubricants. Around 60 percent of the base stocks used for such products were Group III, and around 15 percent was polyalphaolefin. The other base stocks used included synthetic ester, polyalkylene glycol and others.

Group I

Kumar noted the supply of high-performance base stocks has increased tremendously in the past five to 10 years. The share of Group I has consistently declined over the period as a result of declining demand for it, and the proliferation of supply for Group II and III. “This is putting a lot of pressure on existing Group I supply,” he said. “Uneconomical plants have already shut down or face risk of getting rationalized.”

Group I plants are operating at reduced rates, he said, just enough to produce what’s necessary to meet demand. “The demand is low, so they are not able to sell a whole lot,” Kumar noted. “In terms of production, it seems balanced.”

He pointed out the global supply-demand balance picture hides the growing shortage of high viscosity base stocks, especially bright stock.

“There is still considerable demand for such bright stocks, but with the shutting down of Group I capacities, there is the risk of these bright stocks getting a short supply in the near future,” Kumar said. “As a result, what we have observed in the market is some of the Group I base stock producers are reconfiguring or configuring production schemes to produce more heavy products, including bright stock, as compared to lighter grade neutrals.

Group II/III

Group II and Group III base stocks are clearly in surplus, he noted. “This surplus continuously represents more challenge to Group I, and finds applications in new growth areas in terms of applications, and in terms of regions,” he said.

Kline noted that the supply base for Group II base stocks is also getting more diverse. Through 2015, North America (48 percent) and Asia-Pacific (49 percent) held the bulk of such production.

“But some small to medium capacities in South America, Europe and Middle East will be added, which will make these Group II base stocks available in these markets,” Kumar said. “Group II demand is growing across all the regions, and there will be greater competition for North American Group II that is supplied to various markets.”

Asia-Pacific’s share of global API Group III base stock supply could slide to 43 percent by 2025, down from 56 percent in 2015, due to planned capacity additions in other regions, consultancy Kline & Co. projects.

“One fact that is clearly emerging is that [Asia-Pacific] is losing its status as a Group III hub,” Anuj Kumar, a project manager in Kline’s energy practice, said during a webinar Sept. 21 on the company’s latest analysis of the global lubricant base stocks market. “Its position is being challenged by new regions such as the Middle East, where a host of new Group III capacity has been added. Moreover, in markets such as North America and Europe – where the technical demand for these base stocks is quite high – there are certain plans to add Group III capacity in those regions, which will challenge the imports from Asia-Pacific.”

Kline’s projections call for demand for Group III base stocks to grow fastest over the next 10 years, driven by growing technical demand. “That will also include some supply push demand, due to surplus Group III available,” he added.

Demand for synthetic base stocks, such as PAOs and others like synthetic esters, will also be pretty strong, he said, on the back of strong growth in synthetic lubricants demand growth.

The study is titled, “Global Lubricant Base Stocks: Market Analysis and Opportunities (2015 to 2025).”