INSIGHT: Europe Group I base oil suppliers face Group II challenge

19 December 2012 12:38  [Source: ICIS news]

By Carl Roache

LONDON (ICIS)--The European market shift away from Group I base oil dependency is well documented, as more sophisticated lubricants are demanded by the automotive industry, but the increased presence of imported Group II base oil has recently altered the dynamics.

Up until this year, Group III base oils were seen as the main beneficiary of the market shift in Europe, with Group II base oils seen in less significant volumes. However, a clear change has been noted in 2012, as Group II base oils played a larger role.

“Group II is very, very active. It is the place to be, for the volume growth and activity growth,” said a northwest European buyer.

Group II base oils are seen as preferable to Group I for various reasons, including lower sulphur content and higher saturates.

The US and Asia are the major supply sources of Group II base oils globally, and with supply rising both sources are being seen within northwest Europe in increasing volumes.

A northwest European trader explained why the shift has taken place.

Previously, most lubricant formulations in Europe were based on Group I and Group III base oils. However, over the course of the year more European formulations have permitted Group II oils to be used, it said.

“[Group II] has already replaced Group I for part of it, and this will not be the end of it,” said a northwest European buyer, which earlier in the year began importing Asian Group II directly.

One source noted Asian Group II base oils being offered at prices on parity – and in some cases lower – than domestic European Group I base oils.

A buyer confirmed this, and said that the premium previously enjoyed by Group II product versus Group I has declined as suppliers of the former look to boost market share. “[The premium] shrank from $300/tonne [€228/tonne] to nothing,” it explained.

Group II oils are being substituted in by European blenders when possible. A cost saving can be made as less additives are required when using this base oil.

Group I domestic suppliers are well aware of the increased presence of imported Group II base oils within Europe.

“There is Group II available,” said a northwest European supplier. “Prices are competitive to Group I prices so they are buying market share.” This supplier expects the challenge from Group II to increase in coming months.

Other market participants were looking to get involved in the market shift: “We are trying to secure some distribution of Group II in Europe,” said a northwest European distributor. “We think these can [cause] further substitution of Group I base oils.”

The distributor added: “These can have a big impact on the local Group I refineries.”

The market share of Group I is likely to erode further, which could lead to refineries upgrading or moving away from Group I base oils, sources said.

“It is a question of timing because [Group I refineries] will close down more and more,” said a European trader.

The European Group I market has experienced a period of low demand and falling prices in recent weeks. However, the current malaise is not seen as structural, and is more related to the current ongoing global economic uncertainty.

Many market participants expect demand to improve in 2013, but any upturn may not correct the move away from Group I base oils. Certain producers have already indicated their intention to step out of the Group I base oils market.

Essar Energy is pursuing the closure of base oils production at its Stanlow refinery in the UK, but is yet to announce a date. The Mauritius-headquartered company will look to stop the Stanlow unit, which has a nameplate capacity of 260,000 tonnes/year of Group I base oils, in a bid to improve its refining margins.

Despite the growing presence of imported Group II base oils within Europe, not all participants are pessimistic about the future for Group I. Certain buyers said that due to their specific formulations they have no short-term plans to move away from European Group I supplies.

Some Group I suppliers said that the recent poor market made it difficult to accurately assess the future market dynamic. One supplier said more time and data was required, and that any judgement regarding a definite market shift made now would be premature.

The largest use of base oil is to make lubricants for vehicles and machinery. A lesser amount is used to make cosmetics, pharmaceuticals and other process oils.

($1 = €0.76)

By: Carl Roache
+44 20 8652 3214

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