Clearly we are seeing a future that will be quite different from our past in terms of base stock demand outlook, Kumar said. High growth rates are no longer sustainable. Although the global demand outlook is positive, the effective growth rates are lower than observed in the past. We will continue to face a number of uncertainties and challenges in the future.

One factor is the amount of new base oil production capacity planned for the future. In a market that already has a significant amount of surplus capacity, he said, submitted plans call for about 10 million t/y of new base stock capacity to be added over the next 10 years. About 8.7 million t/y is considered credible. The slower than historical demand growth combined with rapid capacity addition is expected to depress medium-term capacity utilization.

The global market should be prepared for more closures of high-cost base oil plants in the future, he advised. Group I is the obvious target, but naphthenic and some of these smaller Group II plants are also at risk, he said. As the oversupply situation continues to persist, we will see some price pressure on all grades of base stocks that are in surplus.

Group I/Bright Stock

Although its share in the total market exhibits a long-term declining trend, Kumar said, the Group I market is impacted in a variety of ways by stringent technical requirements, as well as the growing supply of other base stocks such as Group II and Group III. The stricter NOACK [volatility] requirement in U.S. Standards for engine oil make it increasingly difficult to use Group I, and are leading to its substitution by Group II and Group III, he noted.

Kumar noted that while Group I base oil has substantially exited from automotive formulations, especially in North America and Europe, Group I is a key base stock used to formulate automotive lubricants in markets like Asia Pacific, South America, Eastern Europe and the Africa and Middle East regions.

The industrial segment remains a mainstay application for Group I base stocks. However, it is continuously being displaced by Group II in applications such as hydraulic fluids, turbine oils, gear oils, marine oils and railroad oils, he said. In some applications like marine oils, the use of Group II has created problems of engine cleanliness.

As overcapacity has essentially destroyed the Group II price premium over Group I oils, he noted, substantial reformulation of traditional Group I technical demand will continue for low- and medium-viscosity grades. A radical revamping of remaining Group I capacity may occur, he said, to maximize production of heavy neutrals and bright stocks.

In 2013, the global bright stock market was slightly tight, Kline found, with total demand of 2.6 million tons and supply of about 2.5 million tons.

Kumar noted the bright stock situation differed from region to region. For example, Europe produced almost double the volume of bright stock that it demanded. Hence it is a net exporter, he pointed out. On the other hand, Asia-Pacific had a significant deficit for bright stock, which it met through imports.

Over a period of time, the rationalization of older less efficient Group I base stock plants has caused a decline in bright stock supplies, he said. The market witnessed a significant deficit in 2010, which shot up the prices for bright stocks. And as a result, blenders were forced to explore substitutes, to keep their formulations economical – this trend continues. Going forward, bright stock use in automotive oils will decline as multigrade engine oils replace monogrades, and as viscosities shift toward lighter engine oils for emissions and fuel economy requirements.

Group II/III

Group II represented about a quarter of the global demand for lubricant base stocks in 2013, Kline estimated.

Given the surplus of high-performance base stocks, lubricant quality requirements no longer shape base stock demand, he said. Between 2004 and 2012, the share of Group II and III has grown from 22 percent to 40 percent, an annual growth of 9 percent of high-quality base stocks.

He explained that today, viscosity is far more important than viscosity index and other performance characteristics. Lubricant performance is no longer a good predictor of base stock demand because multiple routes exist for a given performance, he said.

The picture for Group II and III varies by region. Group II and III base stocks are produced in excess in the Asia-Pacific region, Kumar said. Of this surplus, Group III is exported to North America and European markets, whereas Group II remains mostly in the region, targeted at Group I substitution. Group I in the region had a deficit that was partially bridged by imports from other regions like Europe and the Middle East and partially substituted by Group II from the same region.

North America and Europe each produces more base stocks on an overall level than what each region consumes, he noted. North America produces far in excess quantities of Group II base stocks, whereas Europe has excess production of Group I, he said. Both regions are big importers of Group III base stock, which is produced in limited quantities in those specific regions.

He noted that South America has a huge base oil supply deficit compared to its demand, and the deficit is bridged by imports from North America, mainly Group II, and from Europe, mainly Group I base oil.

Klines study is entitled, Global Lubricant Basestocks: Market Analysis and Opportunities.