Its still too early to tell whether changes in Mexicos political and economic landscape will impact its lubricants market, which has seen a slow but steady shift toward API Group II, Group III and synthetic base oils and will soon debut its first engine oil quality certification.
Mexican president Andres Manuel Lopez Obrador took office on December 1, and while his anti-establishment and leftist message won over popular support during his campaign, it raised concerns that market-friendly policies and the economic relationship with the United States-the Latin American countrys biggest market for exports-would suffer.
In addition, Mexicos economy has slowed down over the past couple of years. The countrys gross domestic product grew 2.9 percent in 2016 but just 2 percent in 2017, and economists estimated that the pace was unchanged for 2018.
Another indicator of Mexicos economic slowdown is its manufacturing index, which had shown an upward trend in previous years but is now in the contraction area, after being in the expansion zone for 16 straight months, said Lina Suarez, commercial director for base oils at Teoloyucan, Mexico-based Quimica Delta, during the ICIS Pan American Base Oils & Lubricants Conference in Jersey City, New Jersey.
Despite these indicators, Mexico ranks as the seventh-largest vehicle manufacturer globally, the third-largest light-duty vehicle exporter and the fourth-largest for truck and bus exports, said Jorge Loya, founder and CEO of Raloy Lubricantes in Santiago Tianguistenco, Mexico state. The country produced almost 4 million light-duty vehicles and 165,000 heavy-duty trucks and buses in 2018.
There are 20 manufacturing facilities for passenger cars and 12 plants for heavy-duty vehicle production in the country, operated by automakers such as Toyota, Nissan, Ford and General Motors, in addition to Cummins, Freightliner, Volvo and Isuzu for trucks. Two more assembly plants are scheduled to start production this year: BMWs in San Luis Potosi and Toyotas facility in Guanajuato.
The United States-Mexico-Canada Agreement, signed as a replacement to the North American Free Trade Agreement on Nov. 30 at the G20 summit in Buenos Aires, Argentina, will likely help to sustain Mexicos robust automotive manufacturing sector and with it demand for factory fill lubes.
While it still needs to be ratified by the U.S. Congress, some parts of the pact have already kicked in, such as a deal exempting Canada and Mexico from U.S. automotive tariffs as long as 75 percent of components are manufactured in one of the three countries. (This is up from 62.5 percent under NAFTA.)
To support increasing demand for higher-quality lubricants, the country is launching its first lubricants standards program. Beginning this year, passenger car and heavy-duty engine oils sold in Mexico will be required to meet standards for minimized oil degradation, reduced emissions and increased drain intervals.
NOM-116-SCFI-2018 sets the specifications and test methods with which lubricants must comply to be used in gasoline and diesel engines, as well as information that must be included on the labels of individual containers, Loya told attendees. The certification will be effective 180 calendar days after publication in this quarter, and enforcement of the certification is expected to start in the fourth quarter, he added.
Lubricant companies are required to use test methods from ASTM International to measure base number, phosphorus content, foaming tendency, evaporation loss, pumpability, cold-crank viscosity and viscosity index of engine oils. A certified laboratory must issue an approved quality certificate to back up claims manufacturers make regarding formulation, base oil type and engine test support, said Loya.
In addition, it will be mandatory to obtain a Mexican certification of quality through a committee spearheaded by Mexicos Secretariat of Economy in collaboration with other government agencies and to validate equivalent categories to those from the American Petroleum Institute, he noted. Companies with approvals from API, the European Automobile Manufacturers Association and original equipment manufacturers must have their engine test validation documents and information submitted by their additive manufacturers.
Labels on motor oil containers must list certain technical information, including generic name (whether an oil is for gasoline engines, multigrade or synthetic, for example), API service category, SAE viscosity grade and net volume for containers up to 19 liters. Loya added that the back label of the product should have API usage recommendations, environmental statements and whether the product was made by a company for its own brand or toll blended for a distributor.
The use of lubricants not recommended by automakers results in detriments to end users, the environment and energy consumption, reads the framework of the legislation. Lubricant manufacturing and additive companies subsidiaries in Mexico, including Afton Chemical, Bardahl, Castrol, ExxonMobil, Infineum and Lubrizol, provided input for the legislation.
The Mexican finished lubricants market had total volume of 933.5 million cubic meters in 2018, Loya said at the conference in late November. Sixty-eight percent of this volume was held by the top 11 lubricant producers in the country-ExxonMobil, Shell, Mexicana de Lubricantes, Roshfrans, Raloy, Chevron, Lubral, BP, Total, Bardahl and a combined share for Akron, Fuchs and Kluber-while 18 percent of volume was made by small blenders and 14 percent consisted of imported finished lubricants.
The main application segment is automotive, with passenger car motor oils and heavy-duty diesel motor oils holding 49 percent and 23 percent of market volume, respectively. Seven percent is automotive transmission fluids and gear oils, while the remaining market share is held by industrial oils, Loya added.
Most passenger cars in Mexico use API SN or SM category oils (60 percent), followed by API SJ and SL (37 percent) and API SF and SH (3 percent), the latter two being considered obsolete by API.
On the heavy-duty side, 52 percent of vehicles use API CI-4 and CJ-4 oils, followed by API CF and CF-2 (which are obsolete) at 32 percent and then the most recent heavy-duty categories, API CK-4 and FA-4, at 10 percent. The remaining 6 percent is API CF-4 and CH-4.
The use of obsolete engine oil categories could be attributed to the age of the car parc in Mexico. The average age of a passenger car is 12 years, while the age of trucks, buses and other heavy-duty vehicles is nearly 18 years on average.
The lubricants market in Mexico is very competitive, with over 150 lubricant brands from both oil majors and local companies. In addition, original equipment manufacturers with presence in the country, such as GM, Ford, Daimler, Hyundai, Toyota and John Deere, import their own genuine oils.
Total demand for base oils in Mexico was estimated at 5.5 million barrels per year in 2018. Mexicos national refiner and base oil producer, Petroleos Mexicanos, supplied 13 percent of the countrys requirements (mostly light and medium grades of API Group I), while the remaining 87 percent came from imports, with a large portion originating in the U.S., Suarez stated.
Imports total approximately 4.8 million barrels, with paraffinic base oils making up 86 percent of the imported volumes, followed by naphthenics at 10 percent and other oils at about 3 to 4 percent.
Pemexs base oil production has decreased over the past couple of years due to plant outages, with estimates pointing to 729,000 barrels produced in 2018, a drop of 420,000 barrels compared to 2016. This has diminished the state-owned companys market share, according to Suarez.
In 2015, per each metric ton of base oils produced by Pemex, 4.3 tons were imported. During 2018, the average ratio has been around 6.5 tons of import material per each one produced by Pemex, she said. As such, Pemex produced enough Group I base stocks to satisfy 27 percent of its countrys demand in 2018, with the remaining 73 percent made up by imports.
Group I base oils continue to be the workhorse of the industry in Mexico, at 2.7 million barrels or 49 percent of demand in 2018. This is not likely to change drastically over the next few years, as formulations of some finished lubricants still need certain key performance features that only Group I base oils can provide, Suarez noted. Group II base stocks held 35 percent of the market in 2018. Other base oils, including Group III and synthetics, held a 15 percent share.
However, the share of Group I oils has been going down, while Group II has been going up, because the market now requests lower viscosity engine oils and new formulations for cost optimization, she added. While they havent broken Group Is dominance, imports of Group II base oils rose 16 percent between 2017 and 2018.
The surplus of Group II base stocks in the U.S. has prompted lower pricing, which has made these products more attractive in the Mexican market, especially driven by requirements to meet more up-to-date API Service Categories and higher demand for low-viscosity finished lubricants, according to Suarez. Imports of light-viscosity base stocks jumped from 24 percent in 2015 to 33 percent in 2018.
According to Suarez, Pemex continues to be a key player in the Mexican paraffinic base oil market, and its future will largely depend on the strategic actions that Lopez Obrador takes with his energy reform. He has proposed reconfiguring Pemexs six existing refineries-including its Salamanca facility, which has a 313,000 metric-ton-per-year API Group I base oil plant-and building a new refinery in the state of Tabasco.
Although demand for older API Service Categories has diminished, the change is not happening as fast as the market was expecting, so the final impact of the new OEM requirements is not as high as expected on the total base oil market, Suarez pointed out.
But Raloys Loya assured attendees that Mexico will maintain its strength in the automotive industry thanks to its competitiveness, location and diversity of international commercial agreements, including its production of vehicles for 13 OEMs.
In addition, the NOM-116-SCFI-2018 engine oil certification comes at a time when the Latin American country is aiming to keep unprofessional players out of the market. Loya pointed out that there is unfair competition from market players selling finished lubricants that do not carry OEM or API approvals.
Sometimes end users dont understand what they are buying. We lack well-informed buyers, Suarez explained, stressing that better education is needed for consumers to select the appropriate lubricants for their equipment.