ENERGY INDUSTRY: A LOOK INTO 2020 AND BEYOND
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TABLE OF CONTENTS INTRODUCTION BACK TO BASICS
Be ready for the EV Article - Electric Future Sparks Change in the Lubricants Market Watch out for regional initiatives Article - Lubricant Suppliers Find New Growth Opportunities Beware of competition from genuine oil Article -Value Way Beyond Volume: Passenger car genuine OEM oils build customer loyalty and grow profits in a tough market Marine Industry and IMO 2020 Article - Oil Majors Set to Gain Amid IMO 2020 Chaos
BASESTOCKS
Basestocks from merchants Article - How Basestock Suppliers Can Profit in a Buyer’s Market Basestocks and IMO 2020 Article - Capacity Removal Could Ease Basestock Margin Squeeze
HDMO
The commercial vehicle market is also apt for the efficiency and emissions requirements. Article - What’s driving the heavyweights?
NGEO
Article - Gas Power Generation Spurs Natural Gas Engine Oil Demand
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Introduction While technological challenges and shifts are nothing new in our industry, for many decades the success in lubricant industry was down to an intimate understanding of your immediate customer and the regional markets you are in. In the past, the growth was enough to support opportunities for global players, regional suppliers and everything in-between. Now, due to convergence of multiple macro factors we are facing the market that was deftly named as VUCA (originally by the U.S. Army War College) - volatile, uncertain, complex, and ambiguous.
track the origin of the drivers shaping their business, and act on them proactively.
Technology development across multiple fields often captured under the catch-all title “Digital� underpins many of these disruptive trends through convergence. What made for successful leadership in the past (i.e. technical expertise, an organizational focus on efficiency, commercial excellence) is not any longer sufficient to win in the future. The leaders must look beyond the boundaries of their own operation and supply chain to
Top of industry mind are digitalization, sustainability and e-mobility, but there are other drivers related and enabled by technological advances across all walks of life. Interpreting these developments in a holistic and interconnected way, identifying root causes rather than focusing on symptoms and and developing authentic strategic responses are key to staying ahead in our increasingly competitive industry.
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While we have never had such an abundance of data available, the role of insight and business intelligence is shifting from generating data to reducing the complexity and noise, while expanding the horizon of strategy development to look at seemingly unrelated fields, niche developments that could have disruption potential and the end-use trends well beyond the current boundaries of the lubricant business.
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BACK TO BASICS
Be ready for the EV The undeniable growth of electric vehicles (EVs) is accompanied by the emergence of several new technologies that will impact the volume and type of automotive fluids used in passenger vehicles. The performance requirements for the various fluids consumed in EVs may be significantly different from those used in conventional Internal Combustion Engine (ICE) vehicles. Besides being different from ICE vehicle fluids, the performance requirements of EV fluids may differ based on the
technology used to implement electric drive. Thus, the growth of EVs indicates a new lubricant market niche specifically focused on the lubrication needs of EVs. To develop business strategies and capture market opportunities, one must understand the dynamics of EV penetration, emerging EV technologies that are reshaping the automotive fluids market, and the EV fluids product development processes.
Electric Future Sparks Change in the Lubricants Market The difficulty in predicting just how fast or how far things will move towards full vehicle electrification in the next 20 years makes understanding the implications for the wider industry a significant challenge. Media headlines point to an all-electric future for vehicle powertrains—and apparently soon! Yes, it is certainly one of the key industry disruptors that analysts are closely monitoring. However, views on the future penetration of full electric vehicles are generally shaped by where an organization sits in the market. Battery and electric vehicle (EV) suppliers, for example, naturally paint a picture of strong growth, which makes for exciting headlines. On the other hand, ICE vehicle manufacturers, refiners, fuel suppliers, and lubricant and additive companies suggest a more conservative view.
vestment in charging infrastructure. In this timeframe, most of the so-called “electric vehicles” will be hybrids that will still contain an ICE that will drive the wheels at least some of the time.
Electrification will exert only a limited influence on the demand for passenger car and other finished lubricants to 2025. In some of the fast-growing markets in Asia Pacific and emerging economies in the Middle East, Africa, and South America, robust car sales will continue to drive growth in the passenger car motor oil (PCMO) market. This will even be the case in China, where targets for new energy vehicle sales mean EV penetration is expected to be higher. Here, PCMO market growth will simply reflect the huge rise in car sales, many of which will still contain some form of ICE. Conversely, in the United States and Europe, PCMO demand will be more susceptible to downward pressure, even under a low EV penetration scenario. This is mainly down to technology advances and the desire for longer lubricant drain intervals.
Electrification to 2025 – a niche market Looking at the near term, out to 2025, electric mobility is expected to remain a relatively niche market. The degree of powertrain electrification will vary by region and country, mainly reflecting the push from government regulations combined with the geographic conditions, ready availability of sufficient power and in-
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In this timeframe, fuel economy requirements will push lubricant viscosity grades down to SAE 0W-8 and below. In an environment of new materials, additional complexity, and increased electrification, more advanced lubricants will be needed to ensure sufficient hardware protection is maintained. There is certainly room for significant product innovation and differentiation here.
lubricant consumption, since the lack of an ICE eliminates the need for PCMO, which is the largest lubricant product category. However, BEVs will also create requirements that will drive the development of new products, such as coolants, specialised greases, and gear and transmission fluids. Lubricant suppliers have the opportunity to introduce high-value, EV-specific products to compensate for any volume losses that may occur.
Mass-scale adoption
To be successful in the coming years, as EV adoption continues shaping the market, lubricant suppliers need to closely monitor developments in this fast-changing space. This is particularly the case as EVs exert a greater influence on the finished lubricants market, mainly as a by-product of technological improvements, new production processes, new materials, and the inevitable convergence with other technologies, such as autonomous transportation.
Market participants suggest that 2025 may be a turning point for the mass-scale adoption of full battery electric vehicles (BEVs). This is likely to be the case if, at this point, the cost of BEVs reaches a parity with conventional vehicles or if legislation has been imposed that bans the sale of ICE-powered vehicles. According to Kline analysis, the 2040 landscape for EVs will be very different from that of 2017.
With such a high level of uncertainty ahead, it is important for market players to look beyond the basic market numbers, such as volume growth or decline. By paying attention to the broader shifts within the value chain and by thinking creatively lubricant suppliers will be able to ensure their products are selected by both EV end users and the service providers who are charged with vehicle maintenance.
By 2040, hybrids will have fulfilled their purpose, as the bridge to full electrification. Looking at the world’s 15 leading markets, the market share for BEVs will grow to around 16% of the total EV population, with about half of the world’s EVs being on Chinese roads. However, ICEs will continue to account for more than threefourths of the vehicle population. Clearly, this growth in BEVs has the potential to reduce
EV Population of the World’s Leading 15 Country Markets, 2017 and 2040 2040
2017 98%
70%
0% 0%
20%
2% 2%
30% 5% 5%
ICE-a
BEV
PHEV
HEV
ICE-a
BEV
PHEV
HEV
a- Includes diesel, gasoline, biofuel, and natural gas
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ICE-a
BEV
PHEV
HEV
Watch out for regional initiatives One of the key trends impacting developing markets is the introduction of government initiatives that aim to limit imports in a drive toward self-sufficiency. In Russia, an import substitution policy has been implemented with the end goal of limiting the import of finished lubricants, especially synthetics, while “encouraging” consumers to support domestic Russian suppliers. Similar issues are evident in India and
China, where the “Make in India” and “Made in China 2025” initiatives aim to help local- and state-owned manufacturers provide their products to consumers. These initiatives offer stiff competition to international players and create competitive disadvantages and barriers to entry for organizations without a local presence.
Lubricant Suppliers Find New Growth Opportunities Market overview
volumetric growth. As a result, Kline forecasts a global finished lubricant demand growth at a CAGR of 0.4% over the next 10-year period.
In 2018, the global demand for finished lubricants reached 40.5 million tonnes, with automotive oil products accounting for over 50% and Asia-Pacific taking 44% of finished lube volumes. The two largest markets, the United States and China, combined have the biggest impact on product trends, viscosity grade evolution, supplier positioning, synthetics penetration, and channel shifts.
On the quality side, there is a growing demand for high-performance, lower-viscosity products. In passenger car applications, for example, SAE 0W and 5W grades are expected to account for 26% of total demand by 2028. In the same timeframe, in the commercial vehicle sector, SAE 15W-40 demand looks set to hold at 47%, SAE 10W grades are expected to reach 20%, and monogrades will rapidly exit the market.
However, a number of industry trends including trade ten25%economic pressures, increased vehicle electrification, sions, and a growing use of synthetics are continuing to suppress 20%
Estimated Finished Lubricant Demand in the “Top 20” Leading Country Markets, 2018 North America
15%
Asia-Pacific Europe
10%
South America Africa, Middle East
5%
0%
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Changing market opportunities
that may increase demand for lubricants in the country over the next 5 to 10 years.
In such a lackluster market, Kline’s Energy Practice is regularly asked about volumetric lubricant demand growth and to help identify which country markets offer opportunities for lubricant suppliers. In the not-too-distant past, emerging and developing country markets were rapidly growing in terms of lubricant demand, and suppliers could ride the wave and build volume. As we look ahead, those opportunities seem to be few and far between.
Infrastructure development The Duterte administration’s Build, Build, Build economic project for infrastructure development will primarily benefit the construction segment. The program is planned to increase spending on infrastructure from 5.4% of GDP in 2017 to 7.3% by the end of 2022. Seventy five projects are planned, including airports, railways, bus rapid transits, roads bridges, and seaports, of which the National Economic Development Authority expects some 28 to be completed by 2022. The associated growth in construction activities and the rise in demand for construction equipment can be expected to drive demand for commercial lubricants.
One of the key trends impacting these markets is the introduction of government initiatives that aim to limit imports in a drive toward self-sufficiency. In Russia, for example, an import substitution policy has been implemented with the end goal of limiting the import of finished lubricants, especially synthetics, while encouraging consumers to support domestic Russian suppliers. Similar issues are evident in India and China, where the “Make in India” and “Made in China 2025” initiatives aim to help local and state-owned manufacturers provide their products to consumers. These initiatives offer stiff competition to international suppliers and create competitive disadvantages and barriers to entry for organizations without a local presence.
Growth of ride-hailing services Along with the metered taxis operating in urban areas, the number of private taxis and app-based ride-hailing platforms, such as Grab and Uber, is growing. This is particularly the case in the major cities such as Metro Manila and Cebu. The trend is mainly due to the lack of an adequate public transportation system and is expected to positively impact commercial lubricant demand, as more and more vehicles are added to the fleets of ride-hailing service companies.
It is now more important than ever for lubricant suppliers to focus on identifying and monitoring trends at, or just below, the surface across the globe to be on the right side of the demand wave going forward. In-country primary research conducted by Kline’s Energy Practice team is one way to monitor initiatives and market trends that will power future lubricant demand.
Public Utility Vehicles (PUV) modernization The Land Transportation Franchising and Regulatory Board (LFTRB) and the Department of Transport (DOTr) plan to modernize jeepneys, which have been the most popular means of public transportation in the country. This will be achieved under the Public Utility Vehicle Modernization Program (PUVMP), which features a regulatory reform and new guidelines for the issuance of franchises for road-based public transport services. The program mandates the phasing out of jeepneys and buses aged 15 years and older and the replacement of non-Euro 4 compliant engines with new models. These new engines will likely have OEM engine oil recommendations for current API service category products and enable both longer oil drain intervals and the use of lower viscosity grades.
Exploring opportunities in the Philippines In the commercial automotive market segment, which includes on- and off-highway sectors, market change tends to occur relatively slowly. This means suppliers should look closely for key indicators of change and quickly react to claim their share of the resulting demand. This is no more evident than in the Philippines. The country, for the most part, supports an old vehicle parc with significant demand for monograde heavy-duty motor oil (HDMO). Used vehicles from neighboring countries are routinely imported into the Philippines, continuing the cycle of high monograde demand. This, in turn, means the continued use of obsolete API service categories, low penetration of synthetics, and limited consumer brand awareness and loyalty to a particular supplier.
These are select examples of government and industry initiatives designed to spur economic growth, provide employment, and offer economical and environmentally friendly public transportation options to the general population. Their potential to drive demand for finished lubricants is researched and presented as part of Kline’s new global lubricants report.
However, there are several initiatives and market trends
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Beware of competition from genuine oil There is a large movement by OEMs and dealers to gain some of the traditional quick-lube volumes with branded OEM quick lubes. Ford has nearly 5,000 of its Quick Lane service centers, and Nissan, Toyota, and Chrysler all have their own branded quick lubes. Many OEMs that may not have had genuine oils in the past have recently started to introduce their own OEM genuine oil. Tata and Mahindra recently entered the genuine oil market and have been actively promoting their ventures with free product offers and advertising.
Value Way Beyond Volume
Passenger car genuine OEM oils build customer loyalty and grow profits in a tough market Despite the fact that OEM genuine oils account for just 15% of the 7.3 million tonne global PCMO market, Kline’s Project Manager, David Tsui, outlines why, in a highly competitive market, this segment will experience strong growth, which will have repercussions for branded aftermarket lubricant suppliers.
Estimated Global Genuine Oil Consumption by OEM
With margins on new car sales as low as 7%-10%, OEMs are looking to generate additional revenue via new products and services to help improve profits. Currently, OEM genuine oil represents about 10%-20% of passenger car motor oil (PCMO) consumption, and just seven OEMs account for ~ 89% of the global market. However, this picture could be set to change as more OEMs recognize the value that genuine oils can add to their product offerings. An increase in OEM genuine oils would, however, threaten established branded aftermarket lubricant suppliers. There are two key factors beyond the desire for increased margins that are driving OEMs to grow a profitable aftermarket business based on their own genuine oils. First, doing so is a way to improve customer loyalty; second, doing so can minimize vehicle warranty claims.
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Currently, OEM genuine oil represents about 10%-20% of passenger car motor oil (PCMO) consumption, and just seven OEMs account for ~ 89% of the global market.
Driving customer loyalty
customers back into dealerships but also make the Ford ownership experience easier and worry-free to build customer ranks and revenues over time.
In an era when competition between OEMs for new vehicle sales is extremely high, boosting customer loyalty and creating opportunities for rapport is essential. Regularly bringing owners into dealerships, offering an exceptional customer experience, and using the time to introduce new products and services are some of the ways OEMs can increase the likelihood of retaining future vehicle purchase business.
Reducing warranty claims Carrying out vehicle servicing at a dealership using genuine oil is also regarded by OEMs as one way to help reduce warranty claims. This is, in part, because they can use highly trained technicians who fully understand increasingly complex vehicle technologies. But it is also because the genuine OEM oil used will have been carefully formulated to protect their specific engines.
The fixed operations side of business at dealerships, which includes vehicle servicing, currently accounts for about half of the revenue generated and is one area gaining significant attention. Most OEMs incentivize the dealerships to use genuine parts and oils, particularly because customers view these products as an extension of the OEM brand and, in the high-end bracket, expect premium, long-drain lubes to be supplied.
This is not generally the case for merchant PCMO products, which are typically mass-market engine oils designed to meet a wide range of industry specifications. However, these industry specifications can take a long period of time to update and may not fully satisfy all stakeholder requirements. In North America, for example, when the first allowable use date of May 2020 arrives for ILSAC GF-6, more than eight-and-a-half years will have elapsed since the needs statement was issued.
In the more mature markets, there is a growing trend for customers to go back to dealerships rather than using “do it for me” (DIFM) style operations for servicing and oil changes. This is generally because today’s vehicles are more complex, requiring trained technicians; also, as the market becomes more competitive, dealers are offering promotions to attract customers to use their services.
The same is not the case for genuine oils, since OEMs have the ability to more quickly respond to reported issues by developing specific tests to ensure engine protection is maintained. This has been observed recently when low-speed pre-ignition (LSPI) issues, which can lead to severe engine knock, were observed in the field. In response, some OEMs have developed their own tests and launched anti-LSPI engine oils to protect their specific engines.
Ford ranks high in customer loyalty The Kline study identifies Ford as one of the top OEMs for customer loyalty and dealer compliance. And, in line with market trends, the OEM has announced plans to double its corporate expenditure on customer service, introducing new products and services in support of its dealers.
Future disruptors Looking ahead, two of the biggest disruptors are likely to be the establishment of quick lubes facilities at dealerships and the adoption of ride sharing. Quick lubes built into new car dealerships have been growing nationally with Ford’s Quick Lane at nearly 5,000 dealerships and other OEMs, such as Nissan, Toyota, Chrysler, and GM, all racing to catch up, with many already at more than 1,000 dedicated quick lube centers.
Ford Omnicraft, for example, was the first new brand from Ford’s Customer Service Division in more than 40 years, which will eventually offer over 8,000 replacement parts that can be fitted to just about any vehicle. This enables Ford dealers to service all makes of non-Ford vehicles and to become a one-stop provider of parts to used vehicle outlets, fleet managers and independent garages. Another introduction from Ford is the FordPass Rewards program, which enables consumers to earn reward points on service spending at Ford dealers. The OEM is also piloting mobile servicing in the United States, bringing vehicle maintenance and light servicing to just about anywhere a customer wants. In addition, Ford is working with its dealers to test new global retail formats based on the changing ways people shop today.
In terms of ride sharing, some OEMs are buying stakes in this market and creating mobility service companies that enable customers to order a car via their mobile phone. As ride sharing grows, OEMs are working to position themselves as the provider of cars on which these services rely to operate, moving car ownership from the independent ride sharing company to the OEM. This enables OEMs to control where the vehicles will return for servicing, which means
All these new introductions are designed to not only drive
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lubricant volumes could be expected to move away from DIFM channels to OEMs and dealerships.
Looking ahead, two of the biggest disruptors are likely to be the establishment of quick lubes facilities at dealerships and the adoption of ride sharing.
If these emerging trends take off as expected, there could be a significant positive impact on the genuine OEM oil market.
Genuine oil outlook Regardless of the uptake of dealership quick lubes and ride sharing, the OEM genuine oil market is forecast to grow faster than PCMO across the regions.
If these emerging trends take off as expected, there could be a significant positive impact on the genuine OEM oil market.
In developing markets, growth will be driven by customer loyalty and continued vehicle market growth. In established markets, although declining loyalty will likely dampen sales, particularly in markets where OEMs cannot require customers to return to dealerships to maintain vehicle warranty, growth will come from increased vehicle sales. In the more mature markets, where vehicles tend to be more expensive and complex, growth in genuine oil use will come as consumers return to dealerships that have trained technicians who they perceive will take better care of their car.
Regional PCMO Market by Product Type 2017 and 2022
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Asia Pacific 2017
Asia Pacific 2022
North America North America 2017 2022
Merchant /co-branded
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Factory fill
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Europe 2017
Genuine oil
Europe 2022
Marine Industry and IMO 2020 While the top five major oil companies still hold more than three-fourths of the global marine lubricants market, they have lost around 10% market share to smaller suppliers over the past five years. The mayhem created by IMO 2020 means this trend could be about to change. One of the key issues here is time—or rather, the lack of it. With the IMO 2020 norms being enforced on January 1, 2020, there is very little time left to resolve the issues and ambiguities that remain.
Oil Majors Set to Gain Amid IMO 2020 Chaos In the relatively flat global marine lubricants market, smaller suppliers have, in recent years, been slowly picking away at the market share of the major oil companies. Kunal Mahajan, manager of Kline’s Marine Lubricants Market Report, reveals how the IMO 2020 low-sulfur regulation could be about to reverse this trend. While the global marine lubricants market remains steady, in terms of volume, at 2.3 million tons, the fact that the marine industry is going through a period of unprecedented change makes it a market to watch. The imminent introduction of the International Maritime Organization 0.50% global sulfur cap (IMO 2020) has been widely reported in terms of its implications for fuel refiners, bunker traders, and shippers. However, perhaps an overlooked area is the impact it is expected to have on the marine lubricants market. While the top five major oil companies still hold more than three-fourths of the global marine lubricants market, over the past five years, they have lost around 10% market share to smaller suppliers. The mayhem created by IMO 2020 means this trend could be about to change. One of the key issues here is time – or rather the lack of it. With the IMO 2020 norms being enforced on January 1, 2020, there is very little time left to resolve the issues and ambiguities that still remain. Uncertainty surrounding the route shippers will take to compliance, combined with fuel availability and compatibility concerns, are creating challenges and opportunities. www.Klinegroup.com
As shippers look to maximize vessel up time, maximize the volume of cargo shipped per trip, and maximize profitability, the uncertainty of IMO 2020 is an added complication in an already tough world. Two of the available routes to compliance, installing exhaust gas scrubbers and switching to liquid natural gas (LNG) fuel, have barriers to widespread adoption. Both incur high cost and vessel downtime to install and result in a loss of cargo space, which makes them unattractive. In addition, there are also concerns that, if the IMO were to introduce even lower sulfur targets, scrubbers may become obsolete. LNG has strong environmental credentials: reducing CO2 by some 25% and with almost zero sulfur emissions, making it a strong candidate for the future. This is particularly the case as IMO says that ships built in 2025 must be 30% more efficient than those built in 2014. Although right now, a lack of bunkering infrastructure is the key barrier to the adoption of this compliance route.
Only 3% to 4% of the shipping fleet are expected to choose scrubbers or LNG as a route to compliance in 2020. Due to the constraints of these two options, it looks highly likely that the majority of shippers will meet the new requirements by running their vessels on low-sulfur compliant fuels.
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However, the first batches of low-sulfur marine fuels are only just coming to market, which makes the lack of time remaining to test them a real issue here. This means shippers will have only a limited opportunity to identify any operational, storage, or handling issues the new fuels may present.
Those companies with a global supply capability, who can ensure that compliant fuels and compatible lubricants are available wherever the ships sail, will have an advantage.
Fuel compatibility concerns While some analysts focus on potential low-sulfur fuel availability issues, what is perhaps even more of a concern is fuel compatibility. Given the different approaches to low-sulfur fuel production, it is unclear at this stage what incompatibility issues may arise with fuels sourced from different suppliers. This is raising a number of concerns for shippers:
One trend that may emerge here is a shift to a single supplier approach, where both marine low-sulfur fuels and lubricants are purchased from the same organisation. In addition, as experience with the new fuels grows, operators may also look for suppliers that have the resources to help them resolve any issues that may arise.
• Will all batches of fuel meeting ISO 8217 behave the same in the engine? • Do fuels from different suppliers need to be stored separately on board ship? • How is it possible to be sure the lubricant and fuel are compatible? • Will different lubricants be needed for each fuel?
The major oil companies are probably best positioned to respond quickly from both supply reliability and operational performance standpoints. This could give the five market leaders a real opportunity to regain some of the share in the global marine lubricant market that they have lost in the past few years. Smaller companies may need to look for lucrative new opportunities that are now emerging in this market to offset this trend.
Many of these questions can only be answered when ships are running on the new fuels and operators have a chance to assess how they behave under both normal and slow steaming conditions. This is an uncomfortable scenario and introduces an element of risk that shippers will be keen to mitigate.
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BASESTOCKS
The market has several glimpses of hope going into 2020.
Basestocks from merchants While the market has been undergoing significant structural change, an interesting trend has emerged during this period: the growing role of merchant suppliers of basestocks, globally. Simultaneously, the role of vertically integrated basestock plants used for inhouse lubricant blending diminished. The divergence of supply and demand trend lines increases the surplus and makes the basestocks market a buyer’s market. Increasing lubricant quality and proliferation of specifications also mean that blenders require a wide
variety of basestock to blend their products. Often, a blender would require a wide range of basestocks and grades to cater to a wide range of applications. As a result, vertical integration between basestocks manufacturing and lubricants blending is losing salience, and buyers prefer sourcing basestocks from the merchant market per their needs.
How Basestock Suppliers Can Profit in a Buyer’s Market? Kline’s study shows how basestock suppliers perform against customers’ selection criteria Gone are the days when a basestock supplier could manufacture a product meeting a certain API classification and expect to sell it based on its quality alone. The market is changing dramatically—not only in terms of quality expectations but also in the way it expects to be supplied, which is creating a new set of challenges for marketers. Basestock producers are having a tough time as massive capacity additions, predominantly, of Group II and Group III products come on stream right across the globe in an era of relatively flat lubricant demand. Kline forecasts an average annual finished lubricant demand growth rate of only around 0.4% over the next 10 years, while more than 5 million tonnes of new basestock capacity has been announced and is expected to come on stream by 2028. Not only does the industry have this overcapacity as a backdrop, but there is also a continued growth of merchant basestock supply at the expense of in-house production, which is intensifying competition. This makes it increasingly important for today’s suppliers to understand customers’ purchasing criteria and the decision-making process they apply to select suppliers and products.
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Huge capacity additions Taking a closer look at the major capacity additions, China had brought around 2.1 million metric tonnes of new basestock capacity on stream by the end of 2018, which was primarily accounted for by independent basestock producers. Around 1.8-1.9 million metric tonnes of Group II/III/III+ capacity is on the way in China over the next few years, all of which will be destined for the merchant market. It looks likely that the nation’s capacity will exceed 8 million metric tonnes/yeara by the end of 2019. This would put it just short of the United States, which is the global leader, producing more than 10.7 million tonnes/yearb of paraffinic basestock capacity. a: excluding naphthenic basestocks and re-refined oil b: excluding re-refined oils In Europe, once a big importer of Group II, the new ~1 million tonnes/year Group II capacity from ExxonMobil’s Rotterdam plant, which came on stream in February 2019, looks set to change market dynamics. The organization has also recently announced the completion of an expansion in Singapore and, although the project’s size is unclear, it
will begin to supply customers with Group II products in Q3 2019. In addition, a final investment decision has been made to proceed with a further multi-billion dollar expansion of its refining facilities in Singapore, which will add around 1 million metric tonnes of Group II, with startup anticipated in 2023. New capacities have also started up in regions— the Middle East, for example—which formerly had a minor share in the global basestock supply. It’s not that disconnects between basestock capacity and demand are unusual. Each region produces less of some grades and more of others than it needs, which is why the global basestock industry has a healthy inter-regional trade. However, the growing capacity and demand mismatch is resulting in an unfavorable environment for basestock producers who are experiencing lower operating rates, increased price competition and slim margins.
Rise of merchant marketers The increase in supply over the past 10 years has forced basestock manufacturing to move from a vertically integrated model, mainly serving in-house requirements, to one that is now led by merchant marketers. And, looking ahead, this is a trend that is expected to continue as the number of independent lubricant blenders and marketers across the world grows. Forecasts suggest that of the total 5.0 million tonnes of new basestock capacity expected by 2028, 80%-85% is likely to be destined for the merchant market. Number of Plants
Critical success factors A few years ago, when the supply of high performance basestocks was relatively limited, product quality was often cited as the key factor used when selecting basestock suppliers. Clearly, product quality and consistency are still high on the list of selection criteria since they allow blenders to optimize production processes and costs. However, as the growth in merchant basestock supply continues, suppliers need a good understanding of all the criteria coming into play in the decision-making process to ensure future success. Kline researchers are exploring the impacts of the new market scenario, where high-quality basestocks are readily available across the globe. Via the research, the level of importance customers place on specific criteria during supplier selection will be assessed, including: • • • •
Global coverage of plants and supply hubs Product approvals Range of basestock grades Provision and quality of technical support and customer service • Price consistency and fairness of commercial terms The relative importance of these criteria may vary with factors including customer size, geography, and type of blender. But in such a challenging market, where finished lube demand is almost flat and capacity additions continue unabated, basestock suppliers that understand the changing decision- making processes of their different customer segments are the most likely to succeed.
Split of Basestocks Plants by Nature of Sales, 2008 to 2018-a
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a- Includes only paraffinic plants and excludes re-refineries b- Aggregate capacity of these plants in million tonnes
70 60 50 40 30 20 10 0
Cap-b
2008
17.7
23.8
2018 Primarly in-house
Merchant marketer
15.6
33.4
The volume of paraffinic basestock destined for in-house consumption has fallen.
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Basestocks and IMO 2020 A flat finished lubricant market, significant basestock capacity additions, and a pause in capacity shutdowns are the key factors that have been driving down margins for basestock suppliers. The upcoming Interna-
tional Maritime Organization’s cut in sulfur emissions (IMO 2020) might offer some respite. Will the knock-on effects of this regulation be a plus for basestock suppliers, who are operating in a very tough marketplace?
Capacity Removal Could Ease Basestock Margin Squeeze A flat finished lubricant market, significant basestock capacity additions, and a pause in capacity shutdowns are the key factors that have been driving down margins for basestock suppliers.
for basestock suppliers, who are operating in a very tough marketplace? Certainly, the basestock industry has been under pressure, as production capacities have continued to increase at a time when demand growth from its largest customer–the finished lubricants market–has slowed. By far, the largest share of global demand in the lubricant market comes from the automotive sector. However, in 2018, for the first time in a decade, global automotive production saw a slight decline.
The shipping, refining, and other related industries have been assessing the challenges, opportunities, and cost implications associated with the upcoming International Maritime Organization’s cut in sulphur emissions (IMO 2020). But could the knock-on effects of this regulation be a plus
Global Lubricant Basestock Demand for all Lubricants, 2018
Naphthenic Group II/II+
Group III/III+-a Group III/III+-b
Group IV/V
Group I Total: 36.5 million tonnes
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a- Group III / III+ used in other applications. b- Group III / III+ used to blend synthetic and semi-synthetic lubricants. NOTE: Group III basestocks with VI of 130 and higher classified as Group III+.
Global Lubricant Basestock Effective Capacity by API Groups, 2018
This trend is expected to continue, given the uncertain macro-economic environment and as growing social pressure to reduce carbon emissions spurs ridesharing and the uptake of electric vehicles. (Excluding demand arising from non-lubricant applications such as drilling fluids, solvents, fuel blending, among others.)
Global Average Operating Rates-a by API Groups, 2018
With these market drivers in mind, it is expected that lubricant demand will continue to be essentially flat, projected to grow at just 0.4% CAGR on a global basis for the period 2018-2028. This significant reduction in the growth forecast will impact the outlook for all API basestock categories. In 2018, global finished lubricant demand reached 40.5 million tonnes, and the consequent demand for basestocks was 36.5 million tonnes.
Unbalanced market However, with a global effective basestock capacity sitting at more than 49 million tonnes, the market has remained in surplus capacity. And, in the past year, there have been significant capacity additions along with a slowdown in the removal of capacity via Group I shutdowns. This has resulted in lower average operating rates, which makes it hard to recover costs. While basestock prices in 2018 were generally higher than those in 2017, margins remained under pressure throughout the year. At a global level, the supply of Group I, II, and II+ all exceed demand, while Group III, III+, and naphthenic are generally in balance. Looking ahead 10 years, while not much increase in demand is expected, there is a strong pipeline of new plants and additional basestock capacity on the way. Currently available public announcements suggest that 5 to 5.5 million tonnes of incremental capacity, mostly Group II /II+, will be addwww.Klinegroup.com
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NOTE: Excludes Group V. Group III basestocks with VI of 130 and higher classified as Group III+. a-Operating rate calculated as total production in a calendar year as a fraction of the effective capacity. Effective capacity: total amount of basestocks a plant can produce in a year when it is available for production. It excludes the portion of the year when a plant is down either for planned (e.g. maintenance turnarounds) or unforeseen circumstances.
ed. This does not bode well for a market where demand is forecast to grow at a paltry 0.4% CAGR. This mismatch between the rate of growth for capacity and demand casts an unfavorable scenario for basestock producers. In a scenario where the basestock market is plagued with a flat demand outlook in the wake of consistent capacity additions, the only way margins could be restored is by commensurate capacity retirals. Forecasting how much, when, and where these capacity retirements would happen is an extremely difficult task. However, it is anticipated that IMO 2020 will bring some relief.
The global basestocks market will continue to face challenges, but perhaps there is a glimmer of hope in 2020 as the impacts of the IMO regulations on all the industry stakeholders become clear.
Improved margins ahead? The IMO 2020 regulation, which comes into force on January 1, 2020, cuts global sulphur limits for fuels used onboard seagoing ships from 3.5% to 0.5% (weight/weight). This has wide-reaching investment implications for vessel operators and the world’s marine fuel producers. While IMO 2020 may have several direct and indirect implications on the basestocks market, one such fallout could actually prove to be a blessing in disguise, as it may help to improve basestock margins. It is highly likely that most shippers will choose to comply with IMO 2020 by burning low sulphur fuels rather than installing exhaust gas scrubbers. As a result, demand for high sulphur fuels is expected to decline. This scenario means refineries with heavy equity in high sulphur fuel oil (HSFO) production may struggle to find an alternate market for their products. Those that cannot invest in the upgrades required to produce low sulphur fuel oil may be under threat. And, if the refinery also produces basestocks, capacity shut down here could also be expected. Currently, it is difficult to forecast just how much capacity would be rationalized, and from where. However, in our view, Group I producers in Europe appear to be the most vulnerable. In addition, as demand patterns change, the price difference between low sulphur distillates and gasoil vs. HFSO will widen. It is likely that those refineries with surplus hydrocracking capacity will choose to divert vacuum gas oil from basestock to distillate production. This action would again help to ease basestock overcapacity. There is still much uncertainty ahead for Group I, II and II+ producers. However, the changes arising from IMO 2020 could help them to partially move toward equilibrium in the mid- to long-term. That said, the market could be expected to face considerable inter-API Group competition as blenders explore options to optimize their costs and explore new market positioning strategies.
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HDMO The commercial vehicle market is also apt for the efficiency and emissions requirements. Factors such as technological development accelerated by (or associated with) the online retail boom, as well as the implementation of strict air-quality regulations, are promoting the use of EVs in the commercial vehicle (CV) segment. However, unlike in the passenger vehicle segment, we foresee more modest penetration of EVs in the CV population for a variety of reasons. At the early stages, it is believed that the penetration of EVs will primarily be an application-driven process. For example, LDCVs and MDCVs used for urban haul delivery will be the early adopters of EVs. But there are
other promissory alternative drive systems in the CVs sector, such as compressed natural gas, liquified petroleum gas, hybrid gas/EVs, and flexi-fuel vehicles. As the industry confronts fundamental changes in technology, with the increasing use of digital and connected technologies, companies will take different approaches until a “winning� technical solution emerges. In this regard, OEMs have already introduced and commercialized mixed technology fleets rather than take a one-size-fits-all approach to CVs.
What’s driving the heavyweights?
Understanding the factors shaping opportunities in the commercial vehicle lubricant market Combined, the demand from China and the United States for heavy-duty motor oil (HDMO) represents 35% of the global market. While these two heavyweight markets are being driven by some of the same technology and economic disruptors, there are also a number of key differences shaping their futures. Although declining volumes are forecast in both regions, HDMO suppliers who are aware of the disparate challenges will be well placed to take advantage of the emerging opportunities.
U.S. HDMO market trending to lower viscosity grades In the United States, across the classes, from the lightest to heavy-duty and off-highway, there are estimated to be more than 21 million commercial vehicles in operation. While some 70% of these are on-highway, the more than
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1,300 kilotonnes (KT) demand for HDMO is split almost 50/50 between on and off-highway applications. Commercial vehicle sales between 2013 and 2018 have grown at a compound annual growth rate (CAGR) of 8%. This is a trend that is expected to continue as we look forward over the next five years. However, lubricant demand is forecast to fall, albeit only modestly in the coming years. When looking at the factors affecting lubricant demand, electrification is anticipated to play only a relatively small part. Light commercial vehicles (LCV), used for example in last-mile urban deliveries, are more easily electrified than the heavier classes. However, in the next 20 years, only onethird of LCV in the United States are expected to be electrified, while in the medium and heavy-duty sectors, electrification will still be in the single figures in this time period. As
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the medium and heavy-duty markets look for cleaner technologies, what is far more likely to occur is the use of natural gas and hydrogen as an alternative to diesel fuel. However, currently, the main barriers to their broad uptake are similar to electrification: the lack of infrastructure, high initial vehicle purchase cost, and poor return on investment.
In the transition to new fuels and technologies end users will look for lubricants to help them simplify inventory, minimize misapplication, and reduce costs. Lubricant suppliers who can ensure enough protection across mixed fuel fleets will have an advantage in this market. Emissions reduction and fuel economy measures will have the most impact on the U.S. HDMO market. Currently, SAE 15W-40 is still the most consumed HDMO grade and the uptake of lower viscosity API FA-4 SAE 10W-30 oils has been slow. With the implementation of the next round of greenhouse gas emissions cuts and as large fleet owners appreciate the benefits they can deliver, the penetration of lower viscosity grades SAE 5W-30 and SAE 10W-30 is expected to gradually increase. As fleets replace vehicles, they will look for suppliers with lower viscosity lubricant offerings that can deliver proven hardware protection over longer oil drain intervals (ODI).
Q-up expected in China The market in China is very different to that in the United States. Of the more than 93 million commercial vehicles in operation, some 70% are in off-highway use, mainly in agricultural and construction applications. However, these vehicles account for only 25% of the 1,800 KT HDMO market, which means demand from the on-highway segment in China is twice the size of that in the United States. However, the Chinese on-highway market makeup is very different to that of the United States, with almost 70% of the vehicles being in the light-duty vehicle segment. As mentioned already, lighter vehicles are more easily electrified, which means there could be a larger uptake of new energy vehicles (NEV) in China. The total share of NEV, including battery electric, plug in hybrids, and hybrids, in the on-highway segment is forecast to be just short of 20% by 2040, up from 2% in 2018. Despite the uncertainties surrounding the penetration of NEV into this segment, their long-term penetration will contribute to the volume decline in the region’s HDMO market. In the most likely scenario for NEV penetra-
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tion, total demand for on-highway HDMO is predicted to halve by 2040. Another contributing factor to the negative HDMO volume growth is the expected decline in sales of on-highway trucks and buses at a CAGR of (3.7%) out to 2040. This is based on a number of factors, for example, increased competition from other transportation sectors, such as rail, and the slowdown in economic growth over the longer term. However, what can be seen as a positive trend in China is the anticipated lubricant quality upgrade (Q-up). Although API CF-4 still accounts for one-third of HDMO demand today, tightening emissions legislation, with National VI phasing in from 2020, means continued Q-up is likely here.
80%
By 2027, our projections suggest that 80% of trucks will use quality grades at or above API CI-4. Another trend will be the move to lower viscosity grades as OEMs change oil recommendations to help meet emissions regulations, achieve longer ODI, improve fuel economy and to ensure better protection for their engines. While SAE 20W-50 still holds 50% of the market today, OEMs are increasingly recommending lower viscosity multigrade HDMO instead of monogrades. SAE 15W-40 will post only modest growth, while SAE 5W-40 and 10W-40, currently holding only minor market shares, may witness double-digit growth in the future.
Capturing value Marketers looking for growth in the global HDMO market need to carefully assess the trends in each geographic region to ensure they have the right products to meet the opportunities and challenges that are arising. As volumes decline, suppliers who can quickly identify potential opportunities to meet evolving market needs for improved fuel economy, emissions reduction, reduced vehicle downtime, and cost savings will be able to create and capture value.
NGEO With increasing electricity demand amid growing environmental pollution concerns and climate change, governments have started encouraging the use of natural gas as a viable clean fuel for power generation. This drives the use of natural gas engines and, by default, NGEO.
Natural gas engines are also highly convenient to be used as backup power generators. The increasing demand for electricity is expected to encourage the adoption of natural gas engines as backup power generators due to their inherent characteristics such as short startup time and better load-following abilities. As and when electricity demand grows, the use of natWith regards to production, a key trend that is expect- ural gas engines to produce electricity is also expected ed to influence the global natural gas trade is the in- to increase. Such a trend is expected to provide opporcrease in production and export of natural gas from tunities to the participants across the natural gas value North America, particularly the United States. The chain. shale gas revolution has resulted in robust growth for the otherwise stagnant U.S. natural gas exploration and production industry.
Gas Power Generation Spurs Natural Gas Engine Oil Demand As natural gas production in the United States continues to grow, the benefits of reciprocating gas engines relative to gas turbines are being recognized in certain power generation applications.
tributor to the country’s emissions, which combined with the transportation sector accounted for more than 50% of annual emissions in 2016. This has resulted in the U.S. government taking steps to control emissions from power generation sources. As a result, cleaner-burning natural gas is now emerging as one of the preferred fuels for electricity generation.
The U.S. gas market is undoubtedly one to watch. Here, gas production has risen dramatically, recording nearly a 50% increase Good news for gas engines from 2000 to 2017, driven largely by the This is all great news for natural gas engine producers, whose products are used in gas compression, gas transmisadditional capacity coming on stream from sion, and electricity generation. However, the anticipated shale reserves. growth does not necessarily apply equally right across their For the first time in 2017, the United States moved from being a net importer of natural gas to a net exporter, if only by a small margin. Demand for gas locally and globally, for use in a broad range of applications, is forecast to increase. This will drive further growth in production, which is forecast to reach over 89 billion cubic feet per day in 2019. One of the areas expected to grow in the United States is power generation. According to the Environmental Protection Agency, the power generation sector is the highest con-
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product range. The major electricity producers, for example, are still expected to favour larger gas turbines. This is mainly down to their higher power to weight ratio and longer maintenance intervals, which makes them more economical to operate - providing better financial returns for large power generation projects. Replacing gas turbines is a major challenge for reciprocating natural gas engine manufacturers, a factor that could limit the growth and development of the NGEO industry.
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However, growth in gas engine use will come from smaller users, for example, peak shaving plants and backup and emergency power generation, as they shift away from liquid fuels, such as diesel, towards natural gas. The real benefits of natural gas engines over gas turbines in these applications include their shorter start-up times, higher efficiency over a wider range of output, multi-fuel capability, and better load flexibility. The areas expected to witness high natural gas engine demand are peak shaving power plants and backup/emergency power generation in industrial and commercial settings. To meet the needs of customers in these areas, original equipment manufacturers (OEMs) have developed advanced technology enabling natural gas engines to achieve peak power very quickly. Larger gas turbines, irrespective of the load requirement, are typically run close to full load capacity since altering the output impacts the turbine’s efficiency. This lack of flexibility makes turbines less attractive in these backup, emergency, or peak power production applications. Another growth area for gas engines is in the growing number of combined heat and power (CHP) installations that provide electricity, hot water, and space heating, typically in commercial and institutional buildings. Here, reciprocating gas engines running on natural and biogas are gaining wider acceptance among commercial and industrial consumers due to their high utilization rates and efficiency. A key advantage of reciprocating gas engines in the CHP segment is their modularity, which is an advantage for customers that need to adjust power output based on power demand (known as load following). In power plants, this flexibility is essential, enabling gas engines to be connected together to form generating sets, which at a time of peak load can all contribute to power output. However, during times of lower load, some engines can be turned off, helping to reduce operational and fuel costs. The increased use of stationary reciprocating gas engines in smaller power generation applications will drive up demand for NGEO.
Opportunities in the NGEO market This presents NGEO suppliers and lubricant additive companies with good opportunities. As gas engine operators look to reduce operational and maintenance costs and keep their engines reliably in operation for longer, they need robust oils on which they can rely. To meet demands from their customers, OEMs have been developing more efficient engines, which have the capability to work for longer hours and withstand higher temperatures and pressures. In addition, today’s natural gas engines are able to use multiple gas types, such as landfill gas, biogas, and pipeline gas to produce power. All of these factors mean the latest gas engine oils must be carefully designed to work for longer durations and be tailored for specific engines and fuels in use. However, despite the anticipated NGEO growth, the absence of industry-wide standards is a significant barrier to entry into this market. While the American Society for Testing and Materials and Society of Automotive Engineers have explored NGEO standards, no significant progress has been made due to the heavy investments required to achieve something that would be widely accepted. Instead, OEMs have developed their own standards, based on extensive research involving thousands of hours of field testing and collaboration with other key NGEO industry participants, such as additive and lubricant manufacturers. Lubricant companies with the resources to develop multiple products that meet multiple OEM standards will have an advantage going forward.
Kline Group expects NGEO in the power generation sector to experience a compound annual growth rate (CAGR) of 8.0% from 2018 to 2023. This is well above the growth forecast for the NGEO market as a whole.
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About Kline
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