South American markets are tracking those in the US and Europe by moving to greater use of Group II base oils for automotive lubricants, despite a lack of domestic production
The Latin American base oils market continues to be widely influenced by North America and Europe. One of the main areas in which this is apparent is the shift that is gradually taking place in lubricants for the region’s vehicle fleets.
Automotive lubricant standards from the US and Europe are driving up base oil quality needs in Latin America
Historically, Latin America has been a Group I base oil region, with that base stock predominating in both passenger cars and heavy-duty vehicles. This is now changing as Group II base oils are becoming readily available in the region at prices at or approaching parity to the Group I base stocks.
Performance and fuel economy initiatives in Europe and the US are driving greater use of Group II across Latin America. In turn, this is increasing the uptake of Group II base stock in the region. At the same time it offers regional original equipment manufacturers (OEMs) the opportunity to meet more quickly the standards of European and North American fuel efficiency protocols.
This shift in Latin America from the use of Group I base oils to Group II is likely to accelerate, according to some industry experts. “There is a clear trend towards reducing Group I base stock and increasing Group II, and this may happen faster as new OEM specifications accelerate this trend,” says Infineum’s Margareth Carvalho, a senior technologist at the company.
Latin American lubricants are also heavily influenced by higher North American and European qualities and OEM specifications. Stricter emissions regulations in countries such as Brazil, Mexico and Argentina are moving the market towards higher quality lubricants.
In the Brazilian lubricants market, which accouts for 11% of the Americas market and 52% of South America’s, lubricants must be compatible with alternative fuels based on ethanol. In Brazil, gasoline consists of 25% ethanol, with the blend rate expected to rise to 27.5%. “OEMs are looking to optimise fuel economy for these fuels,” an industry player explains. The trend towards smaller engines in Brazil also creates the need for greater performance from lubricants.
While Brazil does not currently produce Group II base oils, capacity is set to come onstream shortly and there is plenty of imported product available. Group II is widely available in the market, as Latin America is increasingly the near-market of choice for US export opportunities.
Last year was an atypical one for Brazil, with the football World Cup, elections for president, governors and congressmen and a lot of holidays in the calendar. All these, together with a low growth in GDP, triggered a reduction in industrial production and consequently in demand for lubricants.
Brazil imports about 36% of its base stock needs and produces only Group I locally, through Petrobras, which owns all local refineries. There is a small amount of Group II available from Lwart, the biggest Brazilian re-refiner. Therefore, the recent drop in international base oil prices has had a big impact on the Brazilian lubes market.
Last year also brought a big challenge to the Brazilian market because it had to face an increase in local costs, due to high inflation and a heavy currency devaluation. To compete with international prices, Petrobras had to dramatically reduce the internal prices of base oils, by around 14%. Meanwhile, the dollar rate increased by around 15% during the year. This scenario has caused total price reductions of around 26% for base oils, considering prices in dollars.
The re-refining segment is also having a hard time, because the cost of collection of the used oil is going up and final prices of base oils are going down. The finished lube market in Brazil declined by about 4% in 2014, reducing the demand for base oils.
The hope for 2015 is for the new governmental to put the country back on track.
Judith Taylor is a senior editor in the ICIS Houston office. She reports on several market segments, including base oils