LONDON (ICIS)--The European base oils market has been going through a period of transition over the past few years, with the market gradually shifting towards Group II and Group III base oils, while capacity closures have been rife in the Group I market.
This transitional phase looks set to accelerate in 2019 and going into 2020 amid significant changes in terms of both market capacity and regulations.
GROUP II CAPACITY
Europe tends to import most of its Group II and Group III base oils from the US and from Asia, with a real lack of commercial production in the domestic market.
However, this is set to change as ExxonMobil’s Group II expansion at its Rotterdam refinery is due to start commercial production in the first quarter of 2019. No official capacity has been confirmed but market sources suggest it will boast a nameplate capacity of 900,000-1m tonnes/year.
There are a lot of unknowns about this plant and any potential impact it might have on the European market.
Market players say it is unclear what percentage of the plant’s production will be used internally and how much will be offered in the open market.
In addition, it is not clear whether the Group II offerings from ExxonMobil will directly compete with the product flowing into Europe from the US.
There has been speculation that a Group II export market could open up on the basis of this new capacity, but again, it depends on how much of the capacity is actually destined for the open market.
Should this new Group II capacity compete directly with the imported volumes from the US, both the potential for competition and the sizeable new capacity could see Group II prices becoming attractive to buyers who would usually purchase Group I, and this could further facilitate the switch to higher-numbered base stocks.
Switching to a different base oil is not necessarily a decision that can be made quickly or actioned by blenders, but could boost the shift from Group I to Group II in the long term, especially if it works for buyers from a price perspective.
Further aiding this movement towards higher-numbered base stocks in the market are the ACEA 2016 regulations, which came into effect on 1 December this year.
Led by Europe's automobile association, ACEA 2016 dictates the quality specifications for lubricants used in motor engines, which are a major end use for base oils. Industry players say this new specification heavily endorses Group II base oils, and a number of European blenders are expected to, or have already, anticipated the change and shifted towards Group II.
IMO 2020 PROMPTS
Compounding already uncertain times, new rules from the International Maritime Organization (IMO) take effect on 1 January 2020, and shipowners must cut sulphur emissions to 0.5% or less. This will pose challenges for many parts of the shipping, fuels and refinery supply chain.
Challenges for shippers are at least threefold: increased costs from using "scrubber" technology to strip high sulphur fuels of sulphur content, or buying costly new versions of low sulphur fuel. Next, time scales are tough, with a looming deadline and operators trialling options up to the wire. Finally, there are operational challenges of where to load new fuel and find the appropriate new lubricants to match.
The future is uncertain: large quantities of low sulphur fuel are not yet available; refiners’ offerings are not widely known; lubricant approvals from original equipment manufacturers (OEMs) are not yet declared, nor has every vessel operator announced plans.
Some believe this will mean significant change in the market; for others, little or none.
Lubricants are made with base oils. Historically marine has been based on Group I, which is still a key feature of the European base oils market despite the wave of rationalisation that hit around 2015, losing around 1.5m tonnes of capacity.
As Group I base oils supply shrinks and Group II becomes more prevalent, it is possible that in the long-term future, pressure may shift onto the marine sector and Group II could grow. However, at least one hurdle to this, beyond practicalities, is that OEMs do not allow approvals for a lubricant formulation in their engines to be traded across from Group I to Group II.
For the short term, ahead of the 2020 deadline, lubricant producers and additive companies are developing new products; picking a few examples from rival suppliers, there is clearly a mantra of “be prepared”.
However, there is still uncertainty and that is why flexibility and a number of outcomes are being readied.
Flexibility is a key trend in uncertain times. With shipowners like Hapag-Lloyd trialling different technologies, new lubricants are emerging. This is a sea change for fuels in shipping which could have some immediate, some long-lasting, consequences for selected lubricant uses. The short-term horizon is dotted with new lubricants, news of new approvals and new fuels.
Focus article by Sarah Trinder
Additional reporting by Vicky Ellis