Fuels & Lubes International - Q2 2011

Quarter Two 2011 Volume 17 Issue 2

I N T E R N A T I O N A L

High-viscosity

PAOs attract new market players

The evolution of dexosTM Not so rare earth Biofuels need to drop in to take off

> Attention goes to stewardship. > Environment goes protected. > Safety result goes recognized. > Additive goes with care. > Customer goes confident.

Protecting people and the environment is a core value at Oronite.

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The dedication to excellence and innovation that we employ

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in the production of our high-quality additives is the very

of what we believe being a good business partner is all about.

same spirit we apply to our Responsible Care® efforts. You see,

To learn more, please visit www.oronitephilosophy.com.

© 2011. Chevron Oronite Company LLC. All rights reserved. The Chevron hallmark is a registered trademark of Chevron Corporation. Oronite is a registered trademark and Making the things that go, go better is a trademark of Chevron Oronite Company LLC. Responsible Care is the registered service mark of the American Chemistry Council, Inc.

Editor’s Corner Q2: Trouble in every corner A MONTH AFTER JAPAN’S MAGNITUDE 9 EARTHQUAKE and subsequent tsunami, their impact is still being felt not only in Japan, but also around the world.

According to recent reports, more than 27,000 people have been killed or have been reported missing. While Japan will undoubtedly come out stronger after the rebuilding, in the short-term, automakers’ global operations are being “One of the tasks that was hampered by supply shortages of auto parts from Japan. In put forward by the Steering Committee for Asia of addition, the Fukushima nuclear accident has sparked new SAE’s Fuels & Lubricants concerns over the safety of nuclear power and could mean Council recently was to study the effect of each renewed emphasis on alternative energy sources.

Asian country’s energy Meanwhile, political instability in the Middle East and security policy on fuels and lubricants requirements.”

Africa continue to rattle the oil market, thus boosting crude Vicky Villena-Denton oil prices. Consequently, rising energy prices are contributing Editor-in-Chief & Publisher to global inflationary pressures.

Meanwhile, in Europe, the latest EU bailout of Portugal has put the eurozone in a flux and economists are predicting that the European Central Bank’s 25 basis points rate rise on April 7 will further fan inflation within and outside the eurozone.

In North America, while the jobs numbers have improved since last year, there remains uncertainty, especially with the gridlock in Washington over the Federal budget.

Against these uncertainties, energy security will remain a key concern for Asia’s power-hungry economies. One of the tasks that was put forward by the Steering Committee for Asia of SAE’s Fuels & Lubricants Council recently was to study the effect of each Asian country’s energy security policy on fuels and lubricants requirements. The committee, which is ably led by Lubrizol’s Paul Nai, hopes to solicit participation from relevant government agencies and appropriate NGOs, in addition to participation from industry.

Interested parties may contact Paul or the SAE Asian Steering Committee. Information on the committee is available from our social networking site, www.fuelsandlubes.ning.com.

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CONTENTS

PAOs High-viscosity

attract new market players

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Columns

Base Oil Column: Pressure on global market builds up. . . 6 Automotive Column: Engine Oil Quality— Knowledge or Hope? . . . . . . . . . . . . . . . . 8 Guest Column: The marriage of Berkshire Hathaway and Lubrizol—It’s Tradition! . . . . . . . . .14

Features Chemical companies adopt new business models for distributing products in Asia-Pacific . . . . . . . . . . . .

Not so rare earth . . . . . . . . . . . . . . . . . .

Biofuels need to drop in to take off . .

The evolution of dexos . . . . . . . . . . . . .

Coming soon... ILSAC GF-6 . . . . . . . .

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Fuels & Lubes International Quarter Two 2011 Volume 17 Issue 2

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ISSN 0117-9470 Copyright© 2011 F&L Asia, Inc. Cover illustration by Chili Dogs

Contributors Hank Hogan is an Austin, Texas-based freelancer who writes about business, energy, technology and science. Like others in Texas, he’s sold exploration rights to an independent but a gusher hasn’t come in yet.

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Cheryl Knight has been writing on the automotive sector for more than 17 years.

She has profiled manufacturers, leasing companies, businesses that operate automotive fleets and vendors. A mother of two, she enjoys spending time with her family, traveling, attending sporting events and watching movies.

Jonathan Yates is the author of more than 100 articles that have appeared under his byline in Newsweek, Foreign Policy and The Washington Post, among other publications.

He is the holder of degrees from Harvard University, The Johns Hopkins University and Georgetown University Law Center.

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Ted Selby has studied the physical and chemical responses of lubricants since General Motors Research in 1952, Dow Chemical Co. in 1964 and Savant, Inc. in 1971. He is a member or Fellow of several technical societies including the American Chemical Society, the Society of Tribologists & Lubrication Engineers, the Society of Automotive Engineers and ASTM International.

Kelly Thornton is a freelance writer based in San Diego, Calif. She was a staff writer for 18 years at the San Diego Union-Tribune, covering law enforcement and legal affairs.

Jeroen Looye spent seven years as a base oil trader for AP Chemicals in Belgium. He is now an entrepreneur based in The Netherlands and is director of the Dutch company Losiwo B.V. that launched the base oil platform, www. baseoilmarket.com, in 2008.

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ERRATA, Quarter One 2011, page 23: The global lubricants’ share of overall Europe came to 22%, not 11%. The per capita lubricants consumption of the United States was about 17-18 kg., not 70-80 kg.

China’s per capita lube consumption rose by 60% over the last 10, not 20, years.

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BASE OIL COLUMN

I L LU S T R AT I O N BY C H I L I D O G S

Base oil SN500 prices ($/MT) FOB Europe, Asia, Middle East and Baltic

$1200 $1100 $1000 $900 $800

FOB Europe

FOB Asia

Q1 ’11

’10 Q4

’10 Q3

Q2 ’10

Q1 ’10

Q4

’0 9

$700 $600 FOB Middle East

FOB Baltic

Base oil SN150 prices ($/MT) FOB Europe, Asia, Middle East and Baltic

$1200 $1100 $1000 $900 $800

FOB Europe

FOB Asia

Q1 ’11

’10 Q4

’10 Q3

Q2 ’10

Q1 ’10

Q4

’0 9

$700 $600 FOB Middle East

FOB Baltic

Base oil BS150 prices ($/MT) FOB Europe, Asia, Middle East and Baltic

$1600 $1400 $1200 $1000

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$1300 $1200 $1100

Q1 ’11

’10 Q4

’10 Q3

FOB Middle East

CFR NE Asia

Q1 ’11

’10 Q4

’10 Q3

Q2 ’10

Q1 ’10

Q4

’0 9

$1000 $900 $800 $700 CFR India

Base oil SN150 prices ($/MT) CFR NE Asia and India

$1300 $1200 $1100 $1000

CFR NE Asia

Q1 ’11

’10 Q4

’10 Q3

Q2 ’10

Q1 ’10

Q4

’0 9

$900 $800 $700 CFR India

CFR NE Asia

CFR India

Q1 ’11

’10 Q4

’10 Q3

Q2 ’10

$1500 $1400 $1300 $1200 $1100 $1000 $900

Q1 ’10

Base oil BS150 prices ($/MT) CFR NE Asia and India

’0 9

“Pressure on Global Market...” continued on page 17 >>

FOB Asia

Base oil SN500 prices ($/MT) CFR NE Asia and India

Q4

THE FIRST QUARTER OF 2011 WAS A ROARING QUARTER WITH pressure building up in global financial markets. Uprise against governments in several countries in North Africa and the Middle East caused crude oil prices to surge to more than US$115 per barrel. Under the flag of the United Nations, military action was undertaken against the Qaddafi regime in Libya.

Although the situation in Libya is symptomatic for the region, the main focus is on the large oil producers in the region, with Saudi Arabia, Iran and Iraq as important players. The unstable situation in the region pushed base oil prices in Europe to higher levels in March.

The Far East prepared itself for the lubricant peak season between March and May. Chinese base oil imports continued to rise before, as well as after, the New Year festivities. Strong demand from China and India was the main driver which pushed prices continuously upwards. After the earthquake and tsunami in Japan, Asian buyers’ markets slowed down for two weeks due to the uncertainty about a possible escalation of the situation around the Fukushima nuclear reactor. But tight markets caused prices to resume their upward trend. According to the Base Oil Market (BOM) Index, base oil prices for SN150, SN500 and BS150 increased respectively from US$1,020, US$1,075, US$1,310 per metric ton in January to US$1,200, US$1,290 and US$1,535 per metric ton by the end of March on CFR North East Asia basis. This opened up the window for arbitrage from Europe to the Far East in the first quarter.

Many European surplus cargoes were shipped to China and India until the beginning of March when the surplus dried up in Europe.

Q2 ’10

FOB Europe

by Jeroen Looye

Pressure on global market builds up

Q1 ’10

Q4

’0 9

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AUTOMOTIVE COLUMN

Engine Oil Quality— Knowledge or Hope?

B

ILLIONS OF GALLONS OF ENGINE OIL ARE PURCHASED FOR passenger car and truck engines each year with the purpose of protecting these engines from various forms of failure. However, each year, as a result of inadequate engine oil properties—particularly in areas of the world in which passenger cars are relatively new possessions— engines suffer and fail at much cost to the vehicle owner. Essentially, particularly today, knowledge of an engine oil’s quality is critical.

Hope is a very limited and unsatisfying basis of engine oil choice.

In most cases, inadequate engine oil is a product of formulation errors, ignorance, carelessness, or even deliberate and unscrupulous deception. In some parts of the world, the automobile has long been a highly utilized form of personal transportation. Automobile manufacturers in these areas have generated standards of quality that, when properly understood and applied by the user, protect their engines.

Long familiarity with the automobile and its lubrication needs have led to good cooperation between the manufacturers of engine oils and engines. This is not to say that the lubricant and engine manufacturer always agree, but there is an effort to understand one another and the needs of their mutual customers.

Perhaps, the primary difference in their points of view stems from who bears the burden of warranty costs. This is almost always the engine manufacturer who, as a consequence of this burden, wants to assure that the engine oil will meet every potential operational challenge. In comparison, to control costs, the engine oil manufacturer wants the engine oil to meet normal or, at least, reasonable consumer driving patterns.

This difference in viewpoints also affects the choice of tests to prove the quality of engine oils. It is this area of difference that is often vigorously contended and which has often held up the development of new specifications. Today, such difference in viewpoint is even more contentious since the engine oil must meet the demands of:

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P H O T O - I L LU S T R AT I O N BY C H I L I D O G S

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KeroLine™ – Your passion brand for fuel Everything we do at BASF, we do with passion.

KeroLine™ also bears this hallmark. Our new brand for the petroleum industry combines the unrivaled scope of the Kero product range and stands for the highest quality and a first class service.

The Keropur® product name, which is part of the KeroLine™ range, represents an innovative selection of fuel additives which efficiently improve the quality of standard, commercially available fuels in terms of performance, corrosion protection and emissions. As individually formulated, multifunctional additive packages, these products convert any fuel into high-grade, brandquality gasoline and diesel.

Differentiate your fuel – with KeroLine™.

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机油抗 性比

The Institute of Materials

In the early 1980s, questions were raised by an engine manufacturer in North America concerning oil quality in the marketplace. Subsequently, these questions were brought to the attention of the Society of Automotive Engineers (SAE).

The Institute of Materials (IOM) in Midland, Michigan, was formed in 1984 in response to this, by publishing properties of engine oils sold in North American auto-supply markets. IOM’s purpose was to objectively make available bench test data. During the first year, 200 engine oils were picked up, coded and sent to a selected laboratory to run 14 bench tests of both specified and critical performance qualities, such as high shear rate viscosity, oxidation resistance, low-temperature startability and pumpability, among others.

The resulting Engine Oil Database has continued since that time and today 650 engine oils are obtained globally. These oils are examined for qualities which are considered important to modern engines, using 36 bench tests.

As the use of the automobile has been rapidly growing in the Asia-Pacific region, engine oils manufactured in this region are being more closely scrutinized. Variation of engine oil qualities from country to country and in comparison to North America and Eu“...engine and oil rope have resulted in an interesting view. manufacturers in It is of interest to compare a couple of the Asia-Pacific important engine oil properties to show region must create the influence of base stocks, formulation, consumer choices and industry-based an effective mode engine oil specifications. of interaction to

address the future of engines and engine oils used by their mutual customers.”

Oxidation resistance of engine oil

The resistance of the engine oil to oxidation is a very important property.

Oxidation can quickly reduce poorly formulated or erroneously blended engine oil from a benefit, to a source of attack, on the engine. For example, oxidation leads to: • sludge build-up inside the engine • consequent ring belt deposits • organic and hard acid attack on the engine, as deposit-carrying piston rings become less capable of preventing combustion gases from passing by them into the crankcase Certain engine oil additives, if present, oppose oxidation and a number of engine and bench tests have been developed to measure the performance of these additives in the more or less susceptible base oils in which they are blended.

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差 中到好 好到 秀

100

在所收集的油 数中的占比

• smaller engines—sometimes with greater power output • more restrictive rules on exhaust pollution • increased levels of required fuel efficiency • the desire to have longer oil change intervals All of the above affect engine oil properties and its dependence on proper formulation know-how, plus tests and procedures assuring oil quality.

Obviously, these additional demands on the engine oil produce even greater differences among products and greater dependence on hoping that the automobile owner will make the right choice in purchasing motor oil. In addition, rapid advances in the needed quality levels to satisfy newer engines tend to limit confidence in past experiences with older oils. Further, some of the claims made by engine oil manufacturers often only serve to raise consumer uncertainty in trying to distinguish between fact and marketing hype.

In developing countries, the situation is even more difficult as the market carries different levels of engine oil quality. This is particularly the case when there are few, if any, standards by which to judge oil quality, a condition more likely encountered in emerging economies.

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信息取自材料学会的“ 机油数据 ”- 数据的使用 得材料 学会的 可

AxleFacts.com: Harness the Power Knowledge is power. And in today’s rapidly evolving gear oil market nothing is more essential than knowledge – dependable information on what’s new, what’s changing and what’s important to you. That’s why Lubrizol developed AxleFacts.com, a one-stop, online knowledge center. AxleFacts covers the basics – gear oil credentials, lubricants information, hardware – while bringing you real-time industry updates, insightful commentary and an early look at innovations from OEMs/tier suppliers.

Register today at AxleFacts.com. Harness the Power.

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engine in the process of lubrication.

The challenge is: • having sufficient engine oil viscosity at the high shear conditions existing in these lubricated areas, yet • having no more than this viscosity level to reduce loss of fuel efficiency.

This is a delicate balance and rapidly growing in importance as serious efforts are being made to improve fuel efficiency.

Country/Area The relationship between engine oil Figure 1 viscosity at engine operating temperatures Comparison of Fuel Efficiency Affected by Viscosity and shear rates varies with different engine Poor to Fair v-FEI Fair to Good v-FEI Good to Very Good v-FEI types. It even varies from engine to engine.

Excellent v-FEI The simplest way to determine viscous fuel efficiency is to: 1. measure viscosity by high shear rate viscometry 2. at the temperatures found in the high shear rate areas of the engine, and then 3. summing these values according to energy expended in these zones.

Country/Area Figure 2 The result has been called the viscous One of these tests is the Thin Film Oxy- Fuel Efficiency Index (v-FEI) and permits direct comparison of one engine oil to angen Uptake Test (TFOUT). Figure 1 shows a comparison of the oxidation resistance of other regarding fuel efficiency benefits.

Figure 2 shows a comparison of v-FEI for engine oils in both countries and areas of all the engine oils picked from 2001 to 2010. the world. Engine oils collected from 2001 The comparison is made with: to 2010 in 11 countries in the Asia-Pacific 1. red bars indicating poor to fair effects region are compared to one another and with North America and Europe. The latter on viscous fuel efficiency 2. yellow bars indicating fair to two represent areas with longer experience in the development and, particularly, speci- good response 3. green bars indicating good to fication of engine oil quality. excellent response In Figure 1, the percent of oils collected 4. blue bars indicating excellent response in each country or region is divided into In this comparison, Japan, North three levels of quality. The red bars denote oils of poor to fair oxidation resistance. The America and Korea stand out as having yellow bars denote oils of fair to good oxida- the best control of the viscous Fuel Efficiency Index, with 81.7%, 59.6% and 48.1%, tion resistance and the green bars show oils of good to excellent oxidation resistance. It is respectively, of collected engines oils in evident that there are interesting differences the “good to excellent” and “excellent +” ranges. None of the other countries/regions and similarities in the patterns for each have more than a value of 16.0%. country or region. The three bars add up to In appraising the IOM Engine Oil Da100% of the oils collected in each country or tabase for an explanation of these results, region over 10 years, from 2001 to 2010. it was evident that two factors were related.

Regarding the red bars for China and India—which had the greatest percentages of One was that Japan and North American automobile engine manufacturers belong to oils that fell into the “poor-to-fair” category (56.8% and 43.6%, respectively) —several of the International Lubricants Standardization these oils had little or no oxidation inhibitor; and Approval Committee (ILSAC). Among other engine oil performance criteria, ILSAC thus, they were vulnerable to oxidation. places emphasis on improving the engine Japan, North America and Europe oil’s contribution to fuel efficiency. have the longest experience with the testThe second factor was the widespread ing requirements of engine oils. As will be noted in Figure 1, countries manufacturing use of higher viscosity oils in the Asia-Pacific region as a carryover from the long use of a majority of their own oils (rather than importing them) under relatively stringent considerably more viscous oils before the introduction of anti-wear additives decades ago. specifications, have the lowest percentages of poor to fair engine oils, as well as the Replacing hope with knowledge highest levels of good to excellent oils.

For the obvious reasons given earlier, today’s automobile and/or truck owner ofFuel efficiency effects of engine oils A negative aspect of engine oil is the “Engine Oil Quality...” continued on page 17 >> energy that the viscosity takes from the

S w

Comparison of Engine Oil Oxidation Resistance

Percent of Oils Collected

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Poor Oxidation Resistance Moderately Good Resistance Good to Excellent Resistance

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Information obtained using the Institute of Materials (IOM) Engine Oil Database -- data used with IOM permission.

Percent of Oils Collected

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Information obtained using the Institute of Materials (IOM) Engine Oil Database -- data used with IOM permission.

受粘度影响的燃油 性比 v-FEI 差到中 v-FEI 中到好 v-FEI 好到非常好 v-FEI 秀

在所收集的油 数中的占比

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07.02.11 12:29

GUEST COLUMN

The marriage of Berkshire Hathaway and Lubrizol

It’s Tradition!

by Jonathan Yates

Buffet

“Talking your book” is a Wall Street expression for any action that enhances the value of the portfolio of an investor. It derives from the earlier, pre-computer days of the securities exchanges when traders would literally document their holdings in a notebook or binder. >> >> The acquisition of Lubrizol Corp., Inc. by Berkshire Hathaway for US$9 billion in cash and US$700 million in assumed debt is a continuation of legendary investor, Warren Buffet, “talking his book” about the American, and global, economic recovery from The Great Recession. At the vanguard of this recovery have been petroleum additive manufacturers such as Lubrizol, which has increased in price from US$25 a share in March 2009 to the Berkshire Hathaway offer price of US$135, tendered just two years later.

Writing in The New York Times on October 16, 2008, “Buy American. I am,” Buffet, the chief executive officer (CEO) of Berkshire Hathaway, detailed his case for acquiring American companies.

“But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups,

as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Buffet’s “book” is based on the continuing recovery and growth of the American economy. Again, from his October 2008 New York Times piece: “A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933.

By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank.

In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

In the 30 months since his op-ed was published at the nadir of The Great Recession, Buffet has not only “talked his book” but walked it with the US$26 billion purchase of Burlington Northern Santa Fe Railway in November 2009. In his most recent letter to his shareholders, Buffet pointed out that 90% of Berkshire Hathaway’s investment in property and equipment last year was in the United States. Burlington Northern Santa Fe Railway, by far the largest acquisition of Berkshire Hathaway, is based in Fort Worth, Texas; while Lubrizol is headquartered in Wickliffe, Ohio. Buffet, and Berkshire Hathaway, continues to operate from Omaha, Nebraska.

Dissecting the anatomy of the purchase of Lubrizol by Berkshire Hathaway reveals all the marks of a classic Warren Buffet surgical strike: clean, exacting, precise and direct. First, it is an amicable transaction.

Buffet seeks out companies that are well managed, as he intends to retain the key executives. “Lubrizol is exactly the sort of company with which we love to partner... the global leader in several market applications, run by a talented CEO, James Hambrick. Our only instruction to James... just keep doing for us what you have done so successfully for your shareholders,” declared Buffet. This is unlike the modus operandi of many private equity firms, who, after acquiring a company replace much of the staff to extract management fees and salaries from the firm. All the

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senior management at Lubrizol will remain, as the headquarters too will stay in Wickliffe.

Buffet does not actively engage in hostile takeovers Hambrick as bidding wars inevitably ensue. Many times, the management of the target company will counter with a bid of their own to protect their company from the unwanted suitor.

Arbitrage firms, groups betting on the success of a takeover, or those specializing in “green mail,” driving up the price of a company’s stock so as to sell at a profit without any intention of ever running the business, will often times intervene, costing the acquirer dearly.

“The smartest side to take in a bidding war is the losing bid,” Buffet once observed. This is due to the price of the asset being driven up by the competing parties. By facilitating a friendly takeover of Lubrizol, the costs of a bidding war are avoided. These expenses are not just measured in dollars, either. Relations can be tainted between the management groups. Labor alliances can be frayed.

The community surrounding a company, ranging from politicians to neighbors to suppliers to subcontractors, can be soured by the takeover battle. Mounds and mounds of debt can be heaped on the parties involved, weakening future operations and pounding away at the bottom line.

The all-cash offer and 28% premium (US$135 a share tendered by Berkshire Hathaway with the previous Friday’s closing of US$105.44) will, as intended, further ward off any bidding wars from competitors, private equity groups, hedge funds or “green mail’ artists. Once Buffet targets a company, an imprimatur goes along with it, resulting in a premium price for the shares. This has been evinced by the number of investment funds that

replicate his purchases, financial advisors who adhere to his style, and securities that track Berkshire Hathaway stock (there are even two classes of Berkshire Hathaway stock to allow a broader group of investors to buy shares: the “A” shares trade for about US$127,500.00 while the “B” shares go for around US$85.00).

This Buffet “premium” automatically raises the price of the shares of a company’s stock, making it less attractive to other bidders. Structuring the deal so that it is all cash further dissuades any competing offers. In the days of easy money before The Great Recession and after The Dot Com Crash, a montage of securities was offered to pay for companies. Some deals even featured “Payment in Kind” (PIK) financing, where

“A simple rule dictates my buying: Be fearful when others are greedy and greedy when others are fearful.” corporate debt was redeemed for more corporate debt. In The Great Recession, transactions with this type of financing suffered greatly, as to be expected. “Cash is Always King,” particularly in an adverse economic climate. Offering all-cash for Lubrizol ensures that no other bid will be more attractive in financing terms to the board of directors and eventually the shareholders.

Limiting or refusing any debt, even though it could easily be afforded, is another Buffet feature. Companies that generate free cash flow have always been the foundation of Berkshire Hathaway’s holdings. The insurance float, money from insurance company holdings of Berkshire Hathaway such as Geico and GenRe that is not yet obligated, funds US$66 billion in investments. Lubrizol has a modest debt to equity ratio of .62, with a low dividend payout rate of only 13%, resulting in plenty

Berkshire Hathaway executive resigns in wake of Lubrizol acquisition David Sokol, one of Warren Buffet’s top managers at Berkshire Hathaway, resigned after it appeared in the press that he had bought close to US$10 million in shares of Lubrizol Corp., prior to its acquisition by Berkshire Hathaway on March 14. Berkshire Hathaway’s purchase price of US$135 per share meant that Sokol’s Lubrizol holdings had risen by US$3 million after the acquisition. Sokol has denied any wrongdoing.

One of four executives being groomed to succeed CEO Buffet, Sokol said his resignation had nothing to do with his purchase of Lubrizol shares. The U.S. Securities and Exchange Commission (SEC) reportedly intends to investigate whether Sokol held shares in other target companies before they were acquired by Berkshire Hathaway.

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of cash being available for Buffet’s buys in the future. Eschewing debt and acquiring businesses with funds to spare such as Lubrizol, whose revenues were up 46% from 2009, along with traditional cashrich entities, such as insurance companies (Geico, GenRe) and utilities (PacificCorp and MidAmerican Energy) results in massive hordes of capital for Berkshire Hathaway to deploy in acquiring other companies at attractive prices.

This allows for Buffet to adhere to his guidelines as articulated in the Times article: “A simple rule dictates my buying: Be fearful when others are greedy and greedy when others are fearful.”

A massive debt position would greatly restrict this ability, among other activities, too. This was manifested in The Great Recession, and before, when every imperiled brokerage house (Salomon Brothers, Bear Stearns, Lehman Brothers, etc…) eventually ended up at Buffet’s doorstep, rattling a tin cup. While securities firms were leveraging as high as 30 to 1 in the late 2000s, Berkshire Hathaway assembled a cash war chest of US$38 billion during the same period.

Along with the American taxpayer, Buffet saved Goldman Sachs in the Fall of 2008 with a purchase of US$5 billion in preferred stock, with a 10% dividend and warrants. True to form, Buffet receives US$500 million annually in dividend income from this investment. The Buffet premium was activated here too: even though the market was collapsing, after the announcement of the preferred stock buy, the common shares of Goldman Sachs rose more than 10 points.

Lubrizol meshes well with the other holdings of Berkshire Hathaway. While based in the U.S., its growth is forecast for Asia. According to Brian Kelly, founder of Kanundrum Capital, the Burlington Northern Sante Fe buy, “...was hailed by the Oracle as a ‘bet on America.’ We see it a little differently. It is a bet on China and Asia.” Buffet has also bought 9.9% of Chinese carmaker BYD Co. For NetJets, the fractional private jet company owned

by Berkshire Hathaway, an order of up to 120 new Bombardier planes was recently placed, as business travel is expected to surge, particularly in Asia. As Buffet noted in his first trip to India in March 2011, “The American economy is getting better month by month. The more India prospers or China prospers, the more the United States is going to prosper over the long term.” With Lubrizol manufacturing chemical additives in 19 countries for both consumer and industrial products that are sold worldwide, the “Oracle of Omaha” can “Buy American” while continuing to invest and profit from global economic growth.

>> “Pressure on Global Market...” cont. from page 6

The European base oil market was not affected immediately by the rise in crude oil prices in the first two months of the year. During this time, sluggish domestic markets and high production rates kept European products prices at the same level without any movement.

It was not until March that prices rose as surplus spot cargoes were no longer available. Some European producers said their base oils were booked until the end of April or some till the end of May due to significant strong demand from China, India, Vietnam, the UAE and Turkey.

In the Baltic Sea, Russian and NIS product prices were stable until the second half of February when the severe ice situation jammed base oil cargoes between the refineries and the loading ports. Since Russian products were hardly available in the market by then, European base oil prices started surging in March.

Consequently, more upward price pressure was added in the Baltic and Black Sea markets. According to the BOM Index, base oil prices for SN150 and SN500 increased respectively from US$985 and US$1,005 per metric ton in January to US$1,090 and US$1,105 per metric ton by the end of March on FOB Baltic Sea basis.

As the weather is improving, big quantities of Russian and NIS base oil are likely to appear in the market in April, which will ease pressure on prices.

The unrest in North Africa and the Middle East has influenced base oil markets globally, but it did not have a direct influence on the Middle East market.

According to the BOM Index, FOB Middle East prices were stable in January but showed a sudden increase in the second week of February after which they remained unchanged until the beginning of March. Surging European prices, tight supply and strong demand have driven prices upwards since then. Iran suffered from financial problems due to international sanctions restricting trade financing. In the second half of January, the State Bank of India curtailed the issuance of payment instruments for Iranian suppliers, giving Iranian refiners another hard blow as India is the biggest importer of Iranian light grade base oils. By the end of March, the New Year Persian vacation will take Iran out of the market for around two weeks.

Base oil prices rose significantly during the first quarter caused by both external factors, such as rising crude oil prices in tandem with a weakening U.S. dollar, and internal factors, such as refinery turnarounds. Prices are headed to levels not seen since mid-2008. The pressure is building up and prices are being driven by an anxious market. The difference be-

tween mid-2008 and today is that instead of heading for a severe global economic crisis, we are in the process of recovery, with several excesses removed from the global economy. While several economic imbalances remain, we do not believe that the global economy is headed for another

recession. This means that the pressure that is building up in global base oil markets will not be relieved in the same way as in 2008. Markets are therefore likely to remain elevated against a strong economic backdrop, with several risks to the supply side of the crude oil market.

>> “Engine Oil Quality” continued from page 12

manufacturers in the Asia-Pacific region must create an effective mode of interaction to address the future of engines and engine oils used by their mutual customers.

ten has considerably less certainty over the quality of the engine oil he purchases for his vehicle. Without knowledge of engine oil properties, particularly in rapidly developing countries, the vehicle owner can only hope that the engine oil he purchased will serve the engine’s needs for a reasonable length of time.

The foregoing examples of the need to have considerably more knowledge of the qualities of an engine oil readily available to the purchaser has led IOM to make its Engine Oil Database available on the internet (www.iomdata.com). The information would be valuable to: 1. lubricant manufacturers so they can monitor their own and competitive products in the market 2. engine manufacturers so they are aware of engine oil products being used in their engines 3. military and other governmental groups who need to monitor the quality of engine oils being used in their vehicle fleet 4. individual automobile owners who might be at risk from less informed or unscrupulous providers of engine oils.

In view of the many factors coalescing to require more uniform and consistently good quality engine oils, engine and oil

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PA s High-viscosity

attract new market players

Over the last year, the market for high-viscosity polyalphaolefin (PAO) has become quite interesting, with several big players surfacing and putting their stakes into this relatively small, specialty lubricant market. // High-viscosity PAOs are used to formulate synthetic lubricants, greases and fluids and are targeted primarily at demanding industrial applications. Compared to alternatives, they offer better performance, typically thanks to the use of a metallocene catalyst in their production. But the cost is said to be higher than that of competing products. Not everyone, though, sees that as a barrier.

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COV E R

S TO RY

“IF IT CREATES ENOUGH VALUE FOR OUR customers and our customers’ customers, then the product will have the right use in the marketplace.

And we’re convinced we have that kind of a value proposition,” said Habib Quazi, synthetics global vice president at Houston, Texas-based ExxonMobil Chemical Co. The company launched a 150 centiStokes (cSt) PAO in mid-2010. There is a 15,000-metric ton yearly production capacity, through a thirdparty plant in Pasadena, Texas. That, according to Quazi, is sufficient to meet ExxonMobil Chemical’s expected worldwide needs for now. If the new product is successful, though, that demand may change over the next few years. Other suppliers say supply of high-viscosity PAOs has been limited for years, and it has only been until recently that long-time producers, such as Chemtura Corp., are expanding capacity.

The development cycle for new end-user applications created in response to the arrival of new products typically runs 12 to 24 months, Quazi said.

Several producers of conventional PAOs have announced plans to also enter the highviscosity PAO market. Tokyo-based Idemitsu Kosan Corp. revealed its own high-viscosity PAO late last year. Woodlands, Texas-based Chevron Phillips Chemical announced its entry in February. Other players, such as INEOS Oligomers of League City, Texas, have been supplying the market for years, through a third-party producer. INEOS is now building its own manufacturing capacity.

The onslaught of new players into the market is made possible by metallocene, which is used as catalyst for the olefin polymerization, the process by which the individual molecular units are assembled into a long chain. Metallocene catalysts have been used for some time for this task, but it has only been recently that metallocene has been used to produce high-viscosity PAOs. Quazi said ExxonMobil Chemical “has had experience with metallocene technology for over the past 20 years. Initially, we focused on polymers and now we extended the platform to polyalphaolefins.”

Metallocenes are referred to as single-site catalysts because they have a uniform, welldefined geometry around the active polymerization site. The products that result from the use of these catalysts have more uniform properties than those produced by other means, thanks to a more uniform physical arrangement. All high-viscosity PAOs have long backbones. Those made with metallocene catalysts have a regular, comb-like structure with few, if any, of the random side chains found in conventional PAOs. This regular structure, combined with a narrow molecular weight distribution provides improved properties, such as a higher viscosity index. This translates into a smaller viscosity change with temperature, which leads to better flow at low temperatures and increased protection at high temperatures. According to ExxonMobil Chemical, mPAOs

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have a viscosity index value of more than 200 versus 160 for a comparable viscositygrade conventional PAO, a difference of 40 units.

The benefit of this at low temperature can be seen in the pour point of the company’s new mPAO. High-viscosity PAOs also have better shear stability, that is, the ability of an oil to maintain its viscosity or resist breakdown under high shear stress. ExxonMobil Chemical data show that lubricants formulated with mPAO suffer less than half the shear loss of a nonmetallocene-based gear oil after 60 hours, using the tapered roller bearing shear stability (KRL) test. At 192 hours, the shear loss is under 2% for mPAO, compared to more than 10% for conventional PAO. For end users, these attributes should translate into improved energy efficiency and fuel economy, longer drain intervals and better protection for high-end machinery. These properties are most important to end-users in Europe, said Peter Steylaerts, INEOS Oligomers’ linear and polyalphaolefin market manager for Europe, the Middle East and Asia. But, he noted, this performance boost comes at a higher cost for the lubricant, which requires that end-users think through the total cost of a solution. For

expensive oils. If you make the total balance of what you save on energy versus what you pay on oil, there is no comparison,” Steylaerts said.

In the past, the company had been buying highviscosity PAO products from another supplier and reselling them. Since then, INEOS Oligomers has developed its own metallocene-catalyst production process, which took a year or two. Steylaerts puts the company’s high viscosity PAO capacity at about 10% of what’s available worldwide. INEOS Oligomers plans to bring more capacity online, either at existing plants in Feluy, Belgium, La Porte, Texas or elsewhere, as needed.

With regard to Chemtura, the company has recently undergone a capacity expansion, part of on-going efforts to debottleneck manufacturing and boost production at its plant in Elmira, Ontario, Canada. The latest expansion is on track, said Global Marketing Manager Naureen Stone. She did not give capacity numbers or spell out how much of an increase the latest upgrade would yield. But the capacity upgrade would be substantial, she said, and would be completed by the second quarter of 2011. At that time, the company will also have available commercial quantities of its next-generation high viscosity PAO, dubbed

“We’re really making progress in compressor oils, making the industry understand that they pull 10-15% less electricity to drive the compressor if they use more expensive oils.” producers, this demands that they educate users on what can be accomplished with a high-viscosity PAO. “We’re really making progress in compressor oils, making the industry understand that they pull 10-15% less electricity to drive the compressor if they use more

PAO Premium. Two potential viscosity grades for PAO Premium are 50 and 135, as shown by Brian Fox, Chemtura scientist, at a presentation at the 5th Asia-Pacific Base Oil Conference in Singapore in March.

The process for the new product family differs from

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Metallocene PAO Molecular Structure

Conventional PAO

Metallocene PAO

that used for the company’s other high viscosity PAOs, however. Chemtura makes these using conventional techniques, which can involve aluminum chloride or a Lewis acid. A natural inclination would be to assume that the new PAO is metallocene-catalyst based, but the company does not promote it as such.

Nonetheless, Chemtura’s PAO Premium had a highly regular structure, similar to that of a PAO produced by metallocene catalysts.

Chemtura’s Singapore presentation also included a discussion about possible future product directions, such as a 300 cSt PAO. One point that came up during the presentation was that a higher viscosity index may mean that the new products are not drop-in replacements for the old. That is because a higher viscosity index means that the viscosity changes less with temperature.

Thus, the viscosity of old and new may be the same at 100 degrees C but differ at 40 degrees C, the desired operating temperature, by a third.

During a panel discussion at the Singapore conference, it was noted that supply of high viscosity PAOs have traditionally been limited, a condition that makes the market attractive to new producers.

There also has been increase in demand, driven by the growth of new applications, such as wind turbines.

“We do believe that the growth in energy demand in China is driving the development of new applications, such as wind turbines, and some of these new applications are in turn helping to drive demand for highviscosity PAOs,” said ExxonMobil Chemical.

Along with established high-viscosity PAO players, relative newcomers are also entering the market.

Idemitsu Kosan, for example, claims to be the

only Asian producer of highviscosity PAOs. According to Shintaro Suzuki, business manager for performance chemicals at the company’s U.S. subsidiary, Idemitsu Kosan plans to ramp available quantities of its two high viscosity mPAOs tenfold from 2011 to 2014, to produce 10,000 metric tons yearly.

As for where that product will go, Suzuki sees it primarily showing up in industrial gear oils. Chemtura’s Stone agrees. “Synthetic lubricants are growing, especially in the area for industrial gears,” she said.

“There are only three suppliers of high-viscosity PAOs all over the world now and high-viscosity PAOs will become short in supply, so we guess many more companies will come into this PAO market,” said Suzuki.

Chevron Phillips Chemical is the most recent entrant. Amy King, Chevron Phillips PAO business development specialist, said its new products are the result of years of development. She said the company has extensive experience in metallocene technology.

Total annual production has not been set yet, she said, but bulk quantities of the new product will be available by the second half.

Chevron Phillips is counting on its customers to develop applications for the products, although she did say that industrial oils, gear oils and transmission fluids are likely uses for its new mPAOs. Chevron Phillips’ mPAOs have viscosities ranging up to 100 and a viscosity index of about 180.

Regarding her company’s offerings and how they fit into the bigger picture, King said, “The benefit of these new products is twofold.

They increase the volume of high-viscosity PAO, and their improved properties will provide greater flexibility in the formulation and design of lubricants.”

Goldwind is the largest maker of wind power generating turbines in China

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FE AT U R E

Chemical companies adopt new business models for distributing products in Asia-Pacific

by Kelly Thornton

sales and distribution forces in China, rather than using independent brokers as they do in North America.

“In Asia, we’re selling direct,” said Mark Scherer, Master Chemical’s communications manager. “We have a very large sales force that works directly for us, and the relationship between the end-user customer is directly with a representative of Master Chemical.

It’s a very different model.”

On a different level, giant chemical distribution companies, such as Brenntag, are reacting to the changes by enhancing its operations in the Asia-Pacific region.

In February, Brenntag announced it was opening a new distribution facility in Jakarta built to meet growing market demand. Brenntag also acquired an Asian chemical distribution company last year.

Brenntag markets a diversified line of specialty and industrial chemicals in Indonesia for a variety of applications, including personal care, coatings, food & beverage, pharmaceuticals, textile, rubber, plastics & polymers, agro, feed, refrigeration, polyurethanes and minerals. The new facility adds to the company’s eight existing warehouses in Indonesia and its growing distribution network in the Asia-Pacific region, which also includes 40 distribution centers.

At the inauguration of the new site, Brenntag’s Chief Operating Officer Steven Holland described the move this way: “We’ve seen a growth in the demand for chemical distribution in the Asia-Pacific region, especially in Indonesia. By expanding our local presence, we are making an investment to better serve our customers with advanced support and meet growing market demand; it will also strengthen our presence in the region.”

Holland

SINCE IT WAS FOUNDED IN 1951, Master Chemical Corp. developed, tested and approved its specialty fluids for the worldwide metalworking community in a laboratory at its U.S. headquarters in a suburb of Toledo, Ohio.

The company contracted with U.S.based independent distributors to represent its product lines to customers.

But that model has changed dramatically in recent years. Master Chemical has opened three operations in China since 2003—manufacturing plants plus laboratories and technology centers—including one in Tianjin in 2008, where scientists and technicians now formulate and test on-site.

The company’s experience underscores a broader shift of technical expertise and resources from the mature U.S. and European markets to the growing Asia-Pacific mar-

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kets. Industry insiders say the trend—while not entirely new—has accelerated in recent years with the worldwide recession and the emergence of China, and Asia-Pacific in general, as a far more dynamic market.

“What this is all about is switching some of the activities that have been coming out in established markets in Europe and North America to where the business is growing—in the Asia-Pacific region,” said Robert Stubbs, who was formerly a key executive at U.K.-based metalworking fluid additive supplier Polartech, which also had plants in India and China.

The trend has also resulted in big changes in the way those chemicals are distributed to customers—and who is doing the distributing.

Some companies, like Master Chemical, have assembled and trained their own

“By expanding our local presence, we are making an investment to better serve our customers with advanced support and meet growing market demand...”

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To find out more please visit lubrizol.com/asia With you every step of the way. www.lubrizol.com Š 2011 all rights reserved.

Another trend among some of the larger lubricant and additive manufacturers looking to distribute their products: Increased outsourcing to distribution companies. The manufacturers are expecting more of their distributors, looking at them as consultants with expertise in local market conditions, regulations, products and formulations— even cultural matters.

“You need a knowledge-based distributor and therefore increasingly what some of the bigger companies have done in Europe and the USA can be transferred to the Asian marketplace. For example, the company Sea-Land is doing the same thing in Europe and would like to do the same thing in Asia,” said Stubbs.

Stubbs is helping that U.S. company, Sea-Land Chemical Co., capitalize on the changing distribution model by setting up a specialty chemicals distribution network across Europe.

In the last two or three years, the role of distributors of specialty chemicals and lubricants is changing—big companies who have lost a portion of their own workforce because of the recession are relying more on the expertise of smaller distributors.

“Somebody like Sea-Land is taking business away from (big distributors) because bigger companies cannot hope to offer the level of knowledge a Sea-Land can offer,” Stubbs said. “Typically where Sea-Land competes is that understanding of the market place, that knowledge to understand the needs of the customer.

“That’s why Sea-Land is getting involved in Europe,” Stubbs said.

“The market is often made up of small local distributors or made up of very big chemical companies. Sea-Land sits in the middle, a company that can offer all the logistics but with all the local knowledge as well.”

Companies like Sea-Land–mid-size specialty chemical distributors–have carved out a niche.

“There are some big companies like Brenntag or Ashland—they’re chemical distributors that do a great job selling commodities, but if you need a little help you’re not going to get that at Wal-Mart,” said Joseph Clayton, president of Sea-Land.

“That’s what our company does. Some companies need someone with technical sales ability and that’s what we bring to the table.

Scherer

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“By us coming in with a specific niche for some areas we tend to be very attractive,” Clayton said of the company that had US$70 million in sales in 2010.

One of Sea-Land’s clients is Infineum, a major petroleum additive manufacturer.

Sea-Land doesn’t have a presence in Asia yet, but plans to within three to four years as the market becomes more marketfocused, rather than just product-focused, and therefore more friendly to Sea-Land’s unique offerings, Clayton said.

“I think the trend is basically the larger companies not necessarily being able to call on everybody so they want distribution companies because of the highly technical matter,” Clayton said. “They are making sure whoever’s marketing their products has a certain technical background.

“What you end up seeing is you can’t

“There’s a surprising amount of different cultural things that come into play that you don’t expect.”

Mixing tanks at Master Chemical’s Tianjin, China, plant

just have a broker do them, so they want companies that can give them that little extra expertise or advantage out in the marketplace.”

While the market for lubricants and specialty chemicals is booming in Asia, relative to Europe and the U.S., there are still plenty of limitations for distributors in the region.

There are language issues and cultural barriers, as well as tax issues—like having to pay taxes when moving materials from one state to another in India.

Also, there are infrastructure problems. Sometimes it can be physically impossible to transport chemicals because roads or rails are lacking.

“There’s a surprising amount of different cultural things that come into play that you don’t expect,” Scherer of Master Chemical said. “In business, culture still plays a huge role. You really want to move some of that development over there because you need the scientists and chemists to be working more directly with those customers.”

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FE AT U R E

Not so rare

by Cheryl Knight

MINIMIZING THE ENVIRONmental impact of transport fuels and lubricants remains a key initiative for automobile manufacturers around the globe. But keeping pace with governmental mandates remains challenging. China, the United States and the European Union lead all other countries when comparing the percentage of global annual CO2 emissions at 22%, 20% and 14%, respectively.

Road transport, specifically, is responsible for about 33% of all CO2 emissions in the United States and 20% in the European Union. In China, industry experts claim that vehicle CO2 emissions have grown between 5–10% per year since 2004 and will increase even more in the future.

This negative impact on the earth’s environmental footprint, in tandem with stricter emissions directives, continues to drive eco-friendly vehicle initiatives around the globe—from Beijing to Washington, D.C. to Brussels. To comply with these government directives, vehicle manufacturers are integrating the latest exhaust purification systems into vehicles of all makes and models.

and instantaneous; for instance, in cars, depending on the catalyst type, more than 90% of carbon monoxide, hydrocarbons and nitrogen oxides can be converted into less harmful gases.

Many catalysts that stimulate the necessary chemical reaction to achieve such results come from “rare earth elements” (REEs), which comprise a special group of alloys. Mainly used in environmental applications, the use of these metals in catalytic converters continues to evolve.

Basically, automotive catalytic converters transform engine exhaust gas pollutants into non-toxic compounds. REEs play a vital role in the chemical reactions within the catalytic converters, enabling them to run at high temperatures, increasing their

The importance of rare earth elements

The use of catalytic converters in vehicle exhaust systems isn’t new—they made their debut in the mid-70s. And within developed countries, the environmental catalyst market has been growing at a rate of 20%. System results are dramatic

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“We have seen that under certain circumstances phosphorus can be detrimental to the performance of the vanadiumbased SCR catalyst.”

effectiveness, and reducing the use of platinum and other precious metals, ultimately leading to lower production costs.

Rhodia, a world leader in the development and production of specialty chemicals, formulates REE concentrates into high-technology materials for use in automotive catalysis. Rhodia’s fuel-borne catalyst technology, called Eolys, is used in conjunction with a diesel particulate filter.

The fuel-borne catalyst reduces particulate emissions by more than 99%.

But if these metals are rare, how do they result in a cheaper product? The reality is, rare earth metals aren’t really all that rare; they are actually quite abundant within the earth’s crust. Also, compared to traditional precious metal catalysts, use of rare earth metals such as cerium offer cost, performance and processing advantages.

According to Michael Dennis Knudsen, general manager for Haldor Topsoe, naturally occurring chemical elements such as vanadium and zeolite are typically used as the active component in Selective Catalytic Reduction (SCR) catalysts for diesel vehicles. Haldor Topsoe offers a complete range of catalytic products for the automotive industry.

“The vanadium-based SCR catalyst is a very robust catalyst with high tolerance to sulfur from the diesel fuel,” Knudsen said.

“Contrary to zeolite-based SCR catalysts, vanadium-based SCR catalysts are less dependent on the NO/NO2 ratio in the

exhaust gas. Therefore, an expensive Diesel Oxidation Catalyst (DOC) is not necessarily needed upstream from the SCR catalyst for proper functioning.”

Vanadium is a suitable catalyst beyond Euro V in systems relying only on passive regeneration of the Diesel Particulate Filter (DPF) or in systems with the SCR catalyst positioned upstream from the DPF, he said.

However, there are downsides to the use of vanadium, including a limited temperature application range. In systems where the SCR catalyst is exposed to temperatures above 600 degrees C, as in systems where the SCR catalyst is located downstream from an actively regenerated DPF, the vanadium-based SCR catalyst is not suitable.

Zeolite-based catalysts allow for a larger temperature application range. However, zeolite is less tolerant to sulfur and its effectiveness is dependent on a precise NO/ NO2 ratio, which requires an upstream DOC, Knudsen said. Zeolite is also more expensive than vanadium in most cases.

Assessing the lube oil effects on automotive catalysts continues to be a point of study and concern for many companies.

“We have seen that under certain circumstances phosphorus can be detrimental to the performance of the vanadium-based SCR catalyst,” Knudsen said. “Ash accumulation in diesel particulate filters is also a known issue.”

past led to the underdevelopment of REE production in other countries. On the product side, companies such as Apple, General Electric, Toyota, and Johnson Controls have designed products based on the on-going access to affordable rare earth metals from China.

The impact of this policy on foreign countries could be staggering, and in response to China’s plans to cut off a large portion of its cheap REE supply chain, governments and companies are seeking alternative solutions. For instance, Toyota is trying to develop motors that do not require the use of REEs. Countries such as the United States and Australia are reconsidering their mining levels. In fact, the U.S. Senate and Congress might introduce bills that would facilitate the development of rare earth mining on U.S. soil. One method to achieve this goal includes enacting legislation requiring the U.S. Secretary of Energy to establish REE industry loan guarantees. Japan is searching for undersea mineral reserves in the Pacific, as well as developing a partnership with Vietnam, the world’s third-largest producer of REEs.

surrounding the mining of REEs involves serious environmental implications.

Mining REEs produces a “radioactive slurry” as a result of the presence of uranium and thorium in REE ores. Also, toxic acids required for the refining process cause extensive environmental damage, if improperly handled.

In response to the dangerous conditions of REE mining, in February, China’s Premier Wen Jiabao revealed a five-year plan for rare earth mining. The plan pushes new technology, stricter environmental regulations and a move toward consolidating China’s rare earth mining industry, hence the above-mentioned mining shutdowns.

There are even plans to exploit the moon, which holds a supposedly rich and abundant source of REEs deep within its soil. The China National Space Administration (CNSA) has commenced a program for exploring the moon to investigate the prospect of lunar mining, specifically for mining isotope helium-3, for use as an energy source on earth. According to CNSA Director Luan Enjie, humans must learn

Industry pundits say that China’s plans to “slowly strangle its export quotas of rare earth metals” will ultimately fail because markets have a way of quickly and evenhandedly sorting out shortages. An example of this type of crisis management can be seen in the oil debacle, which led to more fuel-efficient cars and other innovations.

According to a www.intellasia.net report, “China is going to discover that the profit-motive and creativity of capitalism is ultimately stronger than its unilateral trade policy.”

to leave earth and “set up a self-sufficient extraterrestrial homeland.”

The U.S. government has its own plans to create a space station on the moon and explore the riches beneath its soil, something that NASA engineers predict will happen realistically between 2030 and 2040.

With an on-going struggle between the benefits of REEs in such products as automotive catalytic converters and the costly environmental disturbances caused by mining rare earth minerals, solutions won’t come hard and fast. One thing is certain: China’s dominance in REE production will spurn new product innovations from companies looking for a more stable REE supply chain.

China, rare earth elements and supply chain roadblocks

China continues to dominate as the world’s largest supplier of REEs. The country produces a whopping 94% of the total supply chain. Demand for REEs remains high—world demand is estimated at 134,000 tons per year, with global production at around 124,000 tons annually. Previously mined above-ground stocks cover the difference. Current estimates put world demand for REEs at 180,000 tons annually by 2012.

However, REE suppliers and potential new entrants into the market have hit a snag in the recent past as China heavily regulated access by foreign companies to its supplies of REEs and plans to continue this policy moving forward. In total, China plans to reduce the number of rare earth mines in the country by 92% and processing firms will also be reduced by up to 72% through a state-owned mining firm-led consolidation.

The complicating issue here is that while other countries, such as the United States and Australia, have the ability to mine their own REEs, the ease of obtaining rare metals from China in the

Environmental solutions: To the moon and back

Another point of contention

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P H O T O - I L LU S T R AT I O N BY N I Ñ O M A N A L I L I / C H I L I D O G S

FE AT U R E

Biofuels need to drop in to take off

by Hank Hogan

The key to sustainable biofuels is to drop the bio, said James Rekoske. That summarizes a presentation he made at the 17th Annual Fuels & Lubes Asia Conference during F+L Week in Singapore in March. Rekoske, who is vice president and general manager of the renewable energy chemical business unit at Honeywell’s subsidiary UOP, contended that to be successful, biofuels need to be drop-in replacements for existing fuels. They need to perform the same and act no differently than today’s petroleum-derived products.

The goal is to have a renewable offering that’s effectively indistinguishable from existing fuels, Rekoske said. “We don’t want you as a consumer or other people to make a compromise.”

Not surprisingly, the Des Plaines, Illinois-based UOP claims to have solved this problem, at least for diesel and jet fuel. In his presentation, Rekoske outlined this solution and the drivers promoting biofuel use.

The push for alternative fuels has three elements: rural development, environmental concerns and energy independence.

Different regions of the world emphasize different elements of the three. In Southeast Asia, for example, the main driver is the desire for rural development, with biofuels perhaps providing a profitable crop that can be grown on what might otherwise be unproductive land.

In taking this tack, such regions have to be careful that the introduction of biofuels doesn’t lead to food or water shortages.

With regard to the latter, certain crops and the resulting fuels, particularly ethanol, can be quite water hungry. In contrast, second-generation feedstocks camelina and

jatropha, two oilseed plants, require much less water during production. Overall, the water demand for biofuels should fall in the coming years, Rekoske predicted.

“As crop scientists become more engaged in this problem, there will be more breeding and establishment of varieties which are more drought tolerant and don’t require the excessive amounts of water,” he said.

Other areas in Asia, such as India and China, look to biofuels both for rural development and energy independence.

Finally, there is Japan, which is embracing biofuels largely for energy independence and out of concern for the environment.

The latter is behind one of the markets that UOP sees for its products, Rekoske said. The aviation industry has adopted a stance of being carbon neutral from 2020 onwards. This means that even though air traffic will grow, the amount of carbon released into the atmosphere will not.

Accomplishing this feat requires more efficient planes, improved air traffic control and sustainable biofuels.

The industry will, in effect, become a carbon recycler when it switches from using petroleum-based fuels to those derived from plants and other natural sources.

“Instead of bringing it from a sequestered reservoir, you’re using it from within the biosphere,” Rekoske said.

It’s important, though, that these new fuels act the same as traditional fuels. For one thing, there is an enormous, worldwide infrastructure valued at close to US$15 trillion that has been constructed over the decades to handle hydrocarbon-based fuels. It will be much easier for any new fuel to be a

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success if it can leverage that investment.

However, one of the issues that Rekoske raised is that ethanol and biodiesel are oxygenated. This makes for chemical instability, which can be particularly troubling in the case of biodiesel. That instability means fuel storage is problematic and usage can differ significantly from that of existing diesel and jet fuel, which are not oxygenated.

UOP’s solution is based on the fact that natural oils and triglycerides have chemical structures and carbon atom counts that are similar to diesel and jet fuel. A key difference is the presence of oxygen atoms in the natural feedstock, which is why the UOP process removes it. When done along with selective cracking and isomerization, the result is what UOP calls green jet fuel.

Green diesel is produced in much the same way, minus the selective cracking step.

The company’s green jet fuel can be derived from jatropha, camelina or a combination of jatropha and algae. Tests have shown that any of these fuels can meet the specifications for A-1 jet fuel. For instance, the specification calls for a minimum flash point of 38 degrees C. Green jet fuels come in anywhere from 41 to 46.5 degrees C, depending on the starting feedstock. More

than 600,000 gallons of these biofuels were produced in 2010, Rekoske said.

The U.S. military has been pushing for the development of such fuels, with flight tests by fighter jets, cargo planes and ground attack craft. A U.S. Navy Hornet fighter jet has been flying daily for months using a biofuel and will tour the U.S. this summer. There also have been flight tests conducted by commercial concerns. All of the major jet engine makers and airframe manufacturers have been involved.

But, even though there’s been considerable progress, don’t expect your next flight to be powered by a biofuel.

“These fuels are not available in commercial aviation today,” Rekoske said.

However, he added, biofuels are in the final stages of certification and he expects them to be in the supply chain by the fall of 2011. They will reduce CO2 and greenhouse gas emissions by at least a factor of two and possibly as much as four-fold over that of kerosene. The new fuels will still require some fossil fuel input, but that demand will be reduced by at least a third from what it is today.

Going forward, if the aviation industry is to meet its goals, the production of such

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32 F U E L S & L U B E S I N T E R N AT I O N A L Q u a r t e r Tw o 2 011

“Going forward, if the aviation industry is to meet its goals, the production of such fuels will have to be increased substantially.” fuels will have to be increased substantially.

One of the challenges that must be overcome is that many of the feedstock producers are not in the petroleum business and are not used to supplying the transportation sector. Thus, they face a learning curve about how to operate in these markets, as well as market expectations. Likewise, buyers will have to work their way up the learning curve.

There also could be a market for green diesel, although here there is competition from biodiesel. Despite its problems, this oxygenated fuel already has infrastructure in place and that serves as a barrier to the entry of a biologically derived but oxygenfree alternative.

Rekoske said that there are two commercialization projects underway in the U.S. based on the UOP technology, with an announced total green jet and green diesel capacity of 16,500 barrels per stream day.

There also are two projects in Asia that are currently being negotiated.

There are some potential problems and wrinkles to this upbeat picture. For instance, the commercial viability of the technology has yet to be demonstrated on a large scale, but that is something that should be proven once pending projects come on stream.

Another challenge is that emerging nations may opt to use biomass for electricity generation, rather than for making liquid fuels. However, producing fuel is more energy efficient than making electricity, thanks to the efficiency of biofuel manufacturing and the internal combustion engine.

Another possible stumbling block is that the aviation industry’s goal of being carbon neutral may require that more steps be taken. Some studies have shown that greenhouse gases emitted high in the atmosphere may be more potent than those emitted close to the ground. If proven true, this may mean that planes will someday be forced to fly in the lower levels of the atmosphere, which could change the nature, economics and technical demands of air travel.

Even with these unknowns, UOP is committed to the technology. That’s because the company sees biofuels as important to the health of the planet and its own well-being.

As Rekoske said, “We think biofuels are a component, another leg, another pillar, of what we want to have in our portfolio.”

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FE AT U R E

The evolution of

dexos

™

by Kelly Thornton

It’s been a long road for General Motors Engineer Eric Johnson. Johnson has traveled the globe in recent years, giving speeches and answering sometimes contentious questions about the automaker’s groundbreaking dexos™ engine-oil specification.

Dexos, the rigorous standard developed

by General Motors exclusively for its brand, was finalized in 2007 and first used for diesel engines in Europe in 2010 models and in gasoline engines in North America and Europe in 2011 models. GM warranties require continued use of engine oils meeting the dexos specification.

“This is the first specification I’ve ever launched. To me it’s been exciting,” said Johnson, who gave another presentation on the topic at F+L Week 2011 in March, at the Grand Hyatt Singapore.

“There have been a lot of high points, some not so high points. It’s been a heck of an education for me.”

Dexos–which GM adopted to streamline its numerous other in-house specifications and to improve the life and fuel economy of its vehicles–has stirred up some controversy along the way.

Some took offense that the existing industry standards were not robust enough for GM. Some companies have snubbed dexos because the licensing fees and complexity made things more expensive and sometimes confusing for consumers.

Some predicted that the efforts of organizations that set industry-wide

34 F U E L S & L U B E S I N T E R N AT I O N A L Q u a r t e r Tw o 2 011

standards—such as the American Petroleum Institute (API) and the International Lubricant Standardization and Approval Committee (ILSAC)—could become obsolete if other companies follow GM’s lead and developed their own mandatory standards.

Johnson addressed a question regarding the future of ILSAC and GM’s future participation in developing new tests for the organization’s next specification, GF-6, at the Singapore conference.

“As far as addressing engine tests we are working on new engine tests, they would be available. I guess it would be up to that committee [ILSAC] how they want to proceed.”

Other critics, such as members of the Independent Lubricant Manufacturers Association (ILMA), balked at the price of doing business with GM on the exclusive dexos.

The price tag for licensing dexos is considerably higher than API’s licensing fees. Licensing fees for dexos were originally said to be about US$1,000 per licensed oil, plus 36 US cents per gallon sold.

Apparently GM has scrapped that formula in favor of a flat annual fee after enduring criticism. But the change has not satisfied some members of ILMA. According to legal counsel Jeffrey L. Leiter, ILMA, which is part of an industry

“As far as addressing engine tests we are working on new engine tests, they would be available.” coalition, went to the U.S. Federal Trade Commission (FTC) in late 2010, and to Capitol Hill to lobby lawmakers, alleging “anti-competitive and consumer deception and confusion with dexos.”

“ILMA and the coalition are continuing to press efforts with FTC and Capitol Hill,” he said.

ILMA, which represents independent lube blenders primarily in the United States, has become a powerful lobby group in Washington, D.C., even though its members make up a small share of the total U.S. lube market.

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GM issued a written reply in response to questions regarding the ILMA complaint.

“GM would fully cooperate with any inquiries or investigations and believes any findings would be in its favor,” said GM spokesman Tom Read.

“Licensing of a dexos product by any oil manufacturer is completely voluntary. GM, like most automobile manufacturers, has specifications for every part of our vehicles including engine oil.

Consumers can find licensed dexos oil today from various sources. By choosing dexos customers are already benefiting with cleaner running engines, improved wear protection and maximum fuel efficiency. Finally, any concerns should be eliminated by knowing GM’s warranty policy has not changed regarding the use of recommended vs. non-recommended fluids.”

In an earlier interview, Johnson said he encountered some tough questions on the

road, from North America and Europe to the Middle East and Asia.

His audiences included members of the auto, lubricant and additive industries.

“Sometimes it gets a little contentious but it’s an opportunity to explain what dexos is all about,” Johnson said. “Sometimes there’s emotion getting involved in there.

They’re expressing what they’ve heard from other sources and sometimes what they’ve heard isn’t entirely accurate.”

Still, Johnson has declared the launching so far a success. More than 30 companies, including Shell and ExxonMobil, have licensed dexos.

And so have many members of ILMA, he said.

“We knew that wasn’t going to be easy and that’s proved true but we’re really, really happy with the licensees we have,” Johnson said. “We think we have some forward thinkers...We knew it was going to be challenging to gain acceptance but the more folks understand what our true goals were, I think acceptance has increased. Clearly we’ve got Europe and North America on board. This year we will focus on South America, Korea and China.”

Johnson said some people don’t respond well to change.

“In a perfect world it would be nice to have 100% of the groups behind you.

I guess we’re realists in that regard as well. We don’t expect 100% of oil companies to license dexos. We never believed we would get everyone on board but we want to have enough that will take care of all our customers.”

Johnson did not apologize for dexos or the royalty program.

He noted that like other auto companies, GM has always had its own engine oil specifications for its vehicles.

It’s common for vehicle manufacturers to require oil formulators to not only meet industry standards, but also their own proprietary specifications.

What’s different with dexos, Johnson said, is “we wrapped a program around it to make it self-funding...It’s different that we charge a royalty for those licenses.”

It’s expensive to develop your own oil specification. Johnson was coy about the numbers, but said GM has spent “millions” to develop, test and market dexos. The company does not expect to recoup those costs for several years.

At F+L Week in Singapore, Johnson explained to a primarily Asian audience that dexos uses its own performance “The Evolution of dexos” continued on page 40 >>

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FE AT U R E

Coming soon...

ILSAC GF-6

T

HE LATEST INTERNATIONAL performance standard for passengercar engine oils was just introduced in October 2010, and already automobile manufacturers are clamoring to develop the next one, worried that it won’t be ready by the time parts run out for some GF-5 tests.

The new ILSAC specification, dubbed GF-6, will likely be introduced in 2015 and will require at least four new engine tests. ILSAC stands for the International Lubricant Standardization and Approval Committee.

Parts for existing tests in the current standard, GF-5, will be unavailable within a few years. For comparison, GF-5, which only had one new engine test and a couple of new bench tests, took about six years to develop. Its introduction was delayed by one year.

“One of the issues is the timing,” said Jim Linden, a retired General Motors engineer now working as a consultant for Toyota Motor Corp.

Once ILSAC chairman, Linden discussed GF-6 at F+L Week 2011, which was held at the Grand Hyatt Singapore in March.

“How long will it take to develop those four replacement tests? GF-5 only had one new test, and it still took five or six years to actually develop GF-5,” he said.

38 F U E L S & L U B E S I N T E R N AT I O N A L Q u a r t e r Tw o 2 011

ILSAC members include U.S. automobile manufacturers GM, Ford and Chrysler, the Engine Manufacturers Association (EMA) and the Japan Automobile Manufacturers Association (JAMA), which includes Toyota.

That group must start the development process by issuing a formal request to the chairman of a sister entity, the ILSAC/Oil committee, which is comprised of representatives from the auto industry, the oil/additive industry and trade associations. That hasn’t happened yet, and some stakeholders are getting antsy.

The American Petroleum Institute (API) cannot license any oil if tests are not available to qualify them. “In 2015, the Sequence VG would no longer be available because there would no longer be parts available to run it. API would not be able to license GF-5 after that point,” Linden said. “There is a reason to replace those tests not only for going to the next category for an improvement in oil, but also to ensure the oils could be licensed.”

It seems like five months since the introduction of GF-5 isn’t exactly a long time before moving on to the next specification. But Linden said it’s longer than usual.

“Actually I think there was more of a delay than most people expected between completion of GF-5 and when GF-6 got off the ground. There are those who would say GF-6 isn’t off the ground yet. I can’t say I’d agree with that,” Linden said.

The tests that must be replaced for GF-6 include: • Sequence IIIG, which currently uses a GM V-6 engine and is a high-temperature oxidation and cleanliness test • Sequence VG, which uses a Ford engine and looks at engine sludge and varnish protection • Sequence VID, which uses a GM V-6 3.6-liter engine and measures the fuel economy benefit of engine oils Linden said work is underway on GF-6. Ford has committed to developing a replacement test for the VG test, which it had previously developed for GF-5, he said, and other automobile manufacturers have indicated they will also step in to develop new tests.

The future of ILSAC has been unclear since GM, one of its key members, developed its own engine oil specification. Known as dexos™, the standard was made exclusively for the GM brand and was first licensed about the same time as GF-5. It

was used for factory fill in all 2011 GM vehicles. Warranties require continued use of engine oils meeting the dexos specification.

Some critics worried that GM’s move, unique because GM built a self-funding program around dexos by charging royalties for the license, would prompt other auto manufacturers to do the same.

But that fear has not been realized, Linden said.

“When GM went off with dexos, there was some question whether or not the ILSAC development process and ILSAC category would continue after GF-5,” Linden said. “There has been a commitment from members of ILSAC to continue that process and that’s why there will be a GF-6.”

At the Singapore conference, Linden was asked about future funding to develop new tests for GF-6. New test development specifically for the Sequence VID was funded by a consortium of members sharing the cost. Linden said that approach was necessary,

“I guess I will not disagree with having other companies contributing toward the funding of test development but having that many cooks in the kitchen I think slowed the process down.” but it had drawbacks.

“ILSAC/Oil decided there was better opportunity to have more companies involved and contributing to that test development,” Linden said. “I guess I will not disagree with having other companies contributing toward the funding of test development but having that many cooks in the kitchen I think slowed the process down.”

Linden said that same consortium approach was unlikely to continue for GF-6. “I see individual companies within ILSAC committed to developing new tests, taking care of funding themselves.”

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>> “The Evolution of dexos” continued from page 36

tests plus others such as ILSAC’s and ACEA’s, as well as proprietary tests of other manufacturers like Daimler’s and Peugeot’s. Ten out of 11 tests for dexos 1 for gasoline engines will need to be replaced, some as early as 2012, most by 2016, and one by 2020, he said, primarily due to lack of parts. These tests include: • Sequence IIIG, an engine test for oxidation, piston deposits and used oil low-temperature pumpability (2015) • Sequence VG, an engine test for sludge, varnish and oil screen clogging (2014-2015) • Sequence VID, an engine test that measures fuel economy (2015) • Sequence VIII, which looks at bearing corrosion (2020) • TU3M, which analyzes flat tappet cam scuffing wear (2012) • TU5JP-L4, which tests oxidation and piston deposits (2012) • M-271, for sludge, is a proprietary test developed by Daimler Corp. It’s unclear how long it will be in use • M-111, for fuel economy, will have to be replaced by 2014 due to lack of replacement parts

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40 F U E L S & L U B E S I N T E R N AT I O N A L Q u a r t e r Tw o 2 011

• GMPTE-T MEC024, a used oil aeration test (2016) • GMPTE-T DUR020, an oil release test that evaluates long-drain intervals (2016) • GMPTE-T DUR021, which tests valvetrain, cam and tappet wear (2016) Johnson said it may be necessary to develop additional tests, like one that analyzes turbo charger deposits or another for plug-in hybrids that looks at wear and lowtemperature performance, to keep pace with technological advances, keep customers satisfied and ensure compliance with more stringent fuel economy requirements and environmental standards.

Dexos requirements are more rigorous than GF-5, the latest standard issued by ILSAC, making dexos a more robust specification, he said.

For example, Johnson said the dexos standard is rated 28% stronger on engine cleanliness than GF-5, which was introduced last October, about the same time as dexos. Johnson said dexos also exceeds GF-5 in corrosion protection and piston cleanliness. Fuel economy is about the same as GF-5. However, dexos’ low-temperature pumpability requirements are more demanding than GF-5.

Dexos formulations require a higher amount of Group III basestock than ILSAC GF-5 formulations, he said.

“We think that makes for better oxidative qualities and potential to last longer,” Johnson said. “Dexos is a specification, it’s not a recipe. But most formulators have found the best way to meet that spec is to use a high percentage of Group III base oils.”

The specification’s impact will be subtle, Johnson said.

“You’re not going to get someone coming back and saying, ‘Gee, the engine does great.’ It’s more of a change where you take baby steps, incremental improvement. It’s not like going from an AM radio to mp3 player with full 5.1 stereo. We think it will help engines last longer. It’s not something the individual driver will experience.”

For instance, he said, there will be a 0.03% improvement in fuel economy with dexos versus GF-4, the international standard that was in place before October 2010. “Take over 70 million GM vehicles in the U.S. and 140 million globally, that’s where the impact is a little bit more quantifiable.”

Johnson downplayed the cost of licensing, saying all oil product prices are increasing generally. And, he said, ultimately dexos will fulfill its mission to improve the experience for GM drivers.

“It’s more evolutionary than revolutionary,” Johnson said of dexos. “It’s certainly different. It takes what is good about the API program and really embellishes or expands on that. I think we have a realistic outlook on what it’s going to cost to keep this specification moving forward. I think we just looked at what was out there and tried to improve what was good about it and change what was not so advantageous about it.”

“It takes what is good about the API program and really embellishes or expands on that.”

01/03/2011 12.26.09

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