Any discussion of the future of API Group I base oils is bound to reach some obvious conclusions, but some less obvious factors are also at play, Amy Claxton, of U.S. consultancy My Energy, told the recent ICIS Asian Base Oils & Lubricants conference.
New base oil capacity is changing the landscape, with 5.8 million metric tons per year of new Group II/III streaming by 2014. The existing market cannot absorb this new volume, Claxton said. Its stating the obvious to say excess base oil capacity will be idled. But its less obvious that not all this idled capacity will be Group I.
Base oil capacity will be reduced in three ways, Claxton noted. First, the highest cost plants will curtail output or close. Asias Group I plants are not particularly vulnerable. Consolidation is most likely in Western Europe.
Second, she continued, international oil companies like Shell, BP, Exxon-Mobil and Chevron, and national oil companies like Petrobras, PdVSA and Pertamina, will close or sell nonstrategic plants. Divestitures will not necessarily be base oil related. Canada, the United States, Argentina, Brazil, Italy, Germany, the United Kingdom and others are home to vulnerable assets.
Third, feedstock and quality changes will reduce output. Whether plants turn to higher processing severity to maintain quality using cheaper paraffinic crudes, or rely on higher processing severity to achieve higher quality base oils from the same crude, the result is lower yield. A whopping 10 to 30 percent lower, according to Claxton.
Its also obvious, Claxton said, that Group I outperforms Groups II and III when it comes to heavy neutrals, bright stock, aromatic extracts and waxes, because only Group I makes these products. All are profitable for Group I plants, and there are no substitutes within two or three times the price of these Group I products.
What is less obvious is that Group I base oils are just fine for more than half of global passenger car engine oil demand, and fine for most heavy duty oils, industrial and process oils, Claxton said. Blenders use the lowest cost base oils that meet specifications. Its all about the lowest total formulated cost, she said.
Rather than ask, What will we do with all this excess Group I capacity? Claxton concluded, perhaps we should be asking, What will we do without enough Group I capacity?
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