An outlook on base oil and lubricant markets


Valentina Serra-Holm, Marketing and Technology Director, Nynas AB


Looking ahead and trying to predict the direction in which the industry is moving and trying to decide on the best strategy to succeed in the future environment is a common business practice. The lubricant industry is no exception. The base oil supply-demand outlook is an important factor impacting lubricant producers’ decisions on many critical issues including the product portfolio, logistics, long-term supply security and R&D resource utilisation.


Predictions in this field are always complex as they are impacted by the overall political situation, changes in the upstream industry, legislation, the global economic situation and in particular the economic development of emerging economies – just to mention some of the most evident factors.


If we look at recent history, lubricant demand in 2014 registered only a modest growth, reflecting a year of global economic struggle. The most significant reason for lubricant demand growing less than expected was the slowing growth in emerging markets. However, on the supply side, 2014 was a year with new Group II and III capacity coming on stream, further increasing the base oil oversupply.


Looking at the current level of demand, 2015 seems to be in line with 2014. In a management interim report published in August 2015, Fuchs Petrolub Group noted that lubricant demand in the mature markets of Japan, Germany,


Korea, France, Italy and Spain declined slightly in the first four months of 2015. The developing countries and emerging markets, on the other hand, enjoyed positive growth in the first half of 2015, albeit at a slightly lower level than in the same period of the previous year. According to Fuchs, the global lubricant market is expected to display moderate growth of around 0.5% in 2015. On the supply front, 2015 is likely to be a rather dynamic year, with both capacity increases and production rationalisation that are going to change the supply- demand picture especially in Western Europe.


If we look forward on a five year perspective, the supply-demand outlook will be the result of the balance between demand headwinds such as longer lasting lubricants, lower losses in use and smaller sump sizes that will continue to reduce the lubricant demand in mature countries, and tailwinds that should lead to an increased demand in emerging economies, such as increasing vehicle population, increased mechanisation and growing industrial production. The growth rate of emerging economies will ultimately set the pace of the future lubricant demand growth – with analysts predicting a Compound Annual Growth Rate (CAGR) varying between 0.5% and 3% over the coming five year period, the lower growth expectation being the general consensus within the industry.


However, whichever way the growth in demand develops, the more than 12 million tons of new Group II and III


capacity that are expected to come on stream during the coming five years will create a strain on the global supply- demand balance. In a very optimistic growth scenario the excess capacity would still reach 6 mmtpa, and in a more realistic growth scenario the excess capacity would be over 10 mmtpa!


The market will need to find a way to deal with the unbalanced supply-demand situation, and several considerations will likely drive production rationalisation. As base oils represent less than 1% of the output of a fuel refinery, the fate of base oil plants will mostly depend on the operations and viability of the mothership refinery. However, other factors such as market demand, crude flexibility and the fit of the base oil plant with fuel strategies will also play a role.


When it comes to demand, during 2014 we have seen that the supply situation, and in particular the large Group II and III availability, has clearly influenced the formulation patterns in the automotive sector on a global level, with an acceleration of the move to Group II and III systems – a reformulation that was purely supply-driven. This has led to a further erosion of the market share of Group I oils, in particular of the SN 150, the fraction typically used in automotive formulation. This was reflected in the first comment from Lukoil since the closure of its Nizhny Novgorod base oil plant, when the company explained that the dwindling demand for SN150 was the main reason behind its decision to close the plant. A declining market


Continued on page 50


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LUBE MAGAZINE NO.129 OCTOBER 2015


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