OUTLOOK ’15: Europe Group I base oils face another difficult year

Ross Yeo

29-Dec-2014

By Ross Yeo

Base oils are used in car enginesLONDON (ICIS)–At the risk of sounding repetitive, European Group I base oil producers are set to face a challenging year in 2015.

This same prediction was made for 2014, primarily because of the anticipated arrival of competitively priced Group II material from Chevron’s new 1.2m tonne/year plant in Pascagoula, Mississippi, in the US.

Challenging conditions did indeed ensue for European Group I producers in 2014, although later than originally foreseen because of a delay to Pascagoula’s start-up, from the end of the first quarter to the beginning of the third quarter.

Yet while the difficult times were delayed, they were ultimately boosted by other factors, namely poor demand and collapsing crude oil prices, and these challenging conditions are set to continue into 2015.

Demand has been disappointing throughout 2014, both on an underlying basis and with respect to Group I, with blenders increasingly moving toward formulations using Group II and Group III instead.

Poor underlying demand for lubricants is linked to the ailing European economy, and as such prospects for a significant improvement next year are not high.

Group I-specific demand erosion in favour of Groups II and III is also likely to continue. Pascagoula material has flowed not only into Europe but also to some key importing countries where it competes with European Group I exports. A good example is India, which also receives Group II imports from Korea and Taiwan, and where European exporters struggled in the fourth quarter to place cargoes.

An SK Lubricants/Repsol joint venture plant in Cartagena, Spain, also started up at the end of September. The plant has a total capacity of 630,000 tonnes/year, approximately one third of which is Group II base oil (albeit with the less common viscosity of 3 centistokes), and two thirds Group III.

Another new Group II/III plant is set to commence production next year in the Middle East. ADNOC’s (Abu Dhabi National Oil Company) plant is expected to come online around the second quarter and will produce 100,000 tonnes/year of Group II and 500,000 tonnes/year of Group III.

Plummeting crude oil prices have, on the face of it, not contributed drastically to Group I refiners troubles, in light of the fact that the collapse has given them access to cheap feedstock vacuum gasoil. However, so rapid has the corresponding collapse been for base oil prices, and so quickly do buyers expect to see upstream losses reflected in base oil prices, that some refiners have begun to suffer.

This is particularly true of inland refineries that face higher transportation costs (and therefore narrower margins) and also longer lead times. With end users being acutely aware of the falling feedstock prices and the backdrop of generally weak market conditions, refiners are being forced to discount base oils that were produced from crude oil purchased earlier, at higher prices.

While no Group I refiners actually closed down in 2014, as was thought possible, some closures have been announced for 2015.

The Colas refinery in Dunkerque, France, will shut its 260,000 tonne/unit in the first quarter, while Shell will shut its 370,000 tonne/year unit in Pernis, in the Netherlands. It is also understood that Total will rationalise some or all of its base oil production In Gonfreville, in France, but details are not clear.

Despite these upcoming closures, the market is expected by most to remain weak for at least the first half of 2015, if not the whole year.

One refiner explained that, rather than tighten up the Group I market, the closures will simply balance it out, possibly stabilising prices but not increasing them. Indeed, most participants expect more Group I capacity rationalisation to follow as Group II and Group III production grows.

The inability of Group I to compete with Groups II and III is a result of the technology paradox; Group II and III base oils are higher in quality but cost less to produce than Group I.

However, not all is lost. Firstly, many industrial lubricant blenders are apparently resistant to switching away from Group I simply because of the time, effort and money it would cost. With a high number of different lubricant formulations already based on Group I base oils, to reformulate these with different base oils will not be a simple task.

Secondly, Group II and III base oil plants do not produce heavy viscosity oils, equivalent to Group I brightstock, and produce middle viscosities at lower yields. Therefore, certain Group I base oil plants may be able to reposition themselves as a niche producers of heavy grades.

Even in the short term, there are some sources that think Group I prices will begin to firm up from January because of customers switching suppliers away from those that are closing.

However, this is the minority view. For most, the coming closures represent the beginning of the long-expected decline of European Group I base oil production.

Neha Popat contributed to this article

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