Market Research: Brightstock Shortage

The dominant trend in the lubricant basestocks industry has been the decline in supply of Group I basestocks due to technical obsolescence as well as over-supply of higher performance Group II and Group III basestocks. Group I basestocks can no longer be used to blend high-performance and mid-tier passenger car motor oils (PCMO) and heavy duty motor oils (HDMO) due to their high sulfur content, high volatility, poor low temperature properties, and low viscosity index. At the same time, the supply of high performance Group II and Group III basestocks has exploded over the last ten years and more new supply is in the pipeline. Oversupply of these high performance basestocks drives the trend to substitute Group I with Group II even in applications where there is no technical need.

The result of this market dynamic has been a dramatic shrinkage in the Group I market. Between 2006 and 2009 the share of Group I basestocks in overall supply has declined from 66% of total to about 55% of total on a global basis. The decline in North America and Europe where most of the Group I plant closures occurred has been even more pronounced.

One of the collateral damage of declining Group I basestock supply has been the steady erosion in the supply of brightstocks. These high viscosity lubricant basestocks are manufactured exclusively by Group I basestock plants via propane de-asphalting and solvent refining of vacuum resid, the bottom fraction from a vacuum distillation tower. As these heavy basestocks are not manufactured by Group II and Group III basestock plants, shutdown of Group I plants causes a permanent reduction in brightstock supply.

The problem has been slow to creep up on the lubricants industry for two reasons. First, the rate of decline for brightstocks has been slower than the overall Group I supply decline rate. This is because not all Group I plants produce brightstocks. When a plant that doesn’t produce brightstock shuts down, there is no impact on the brightstock market. Second, some applications that consume brightstock, for example higher viscosity monograde engine oils, have experienced a decline in demand, thereby causing a decline in brightstock demand.

The global recession and the resultant contraction in industrial lubricants demand has put a serious dent in the economic viability of Group I plants. The prospect of a very large shortage of brightstock in the near future has focused many minds on finding technically acceptable and economical solutions.

Brightstock market space
Brightstocks are used in applications where lubrication is needed at high temperature or under heavy loads. Products with high percentage of brightstock in their formulations include monograde engine oils, automotive and industrial gear oils, marine cylinder oils, industrial hydraulic oils, greases, and process oils for tire and rubber industries. Figure 1 provides an estimate of the relative size of different applications in overall brightstock demand.

Figure 1: Brightstock Demand by Major Applications

Automotive and industrial gear oils account for about 33% of the total demand for brightstocks, followed by HDMO at 15% and process oils (essentially tire and rubber oils) at 14%. The other major applications include PCMO, grease, and marine oils. Each of these applications has a different dynamic in terms of growth. While process oils and marine oils are expected to show strong to moderate growth due to the growth in their end-user industries, other applications are likely to be flat or declining for various reasons. In the case PCMO and HDMO, brightstocks are used to formulate monograde engine oils.

The use of monograde engine oils is declining due to the scrapping of old buses, trucks, and cars that use these products and also due to the fact that these products are no longer recommended by most OEMs. In case of off-highway mining and construction equipment the usage of monogrades continues, though here too it is expected to taper off in the distant future. Gear oil demand growth is subdued due to drain interval extension and use of fill for life lubricants. However, due to strong automotive sales, consumption of gear oils will continue growing. The overall demand for grease is expected to remain flat or show weak growth. Factors subduing grease demand growth include penetration of automatic greasing systems which reduce the amount of grease consumed, use of longer life grease, and use of sealed for life bearing.

Brightstock supply-demand balance
Based on Kline’s proprietary basestock supply-demand analysis model, the current and emerging brightstock market balance is as shown in figure 2.

Figure 2: Global Brightstock Supply Demand Balance, 2005-2018

The brightstock market was fairly well balanced in 2005 with little surplus supply. By 2010, both supply and demand had declined due to Group I plant closures and subdued demand due to the recession. While demand is likely to pick up, growing at about 2%, supply is forecast to decline at about 1% per year during the same period. As a result, the deficit in brightstock market can reach as much as 20 KBD by 2020.

The increasing deficit in the brightstock market is reflected in the relative price levels of 150SN and brightstock. Figure 3 provides the price delta between brightstock and 150SN calculated on the basis of FOB US Gulf Coast price postings for the two grades. Price data was obtained from ICIS Pricing. As can be seen, the delta between brightstock and 150SN has steadily widened from around $15/bbl in 2000 to around $40/bbl in 2010. The upward trend in this price delta took off in 2003-04 when the cull of Group I plants began.

Figure 3: Price Delta Between Brightstock and 150SN*

The rising delta between 150SN and brightstock clearly reflects the different market situation for the two product categories. Group I 150SN faces severe competition from Group II and Group III basestocks produced in this viscosity range and targeted for automotive applications. As a result, it is getting increasingly difficult to find a home for all the Group I production in this viscosity range. On the other hand Group I heavy neutral grades and brightstocks face much lower competition from Group II and III. This is because Group II / III plants have lower share of production in the heavy viscosity grades and they don’t produce brightstock. Hence brightstocks along with heavy neutral grades are becoming valuable commodities.

This pricing dynamic will have diverse consequences. Because of the rising value of brightstock and petroleum wax, a Group I basestock manufacturing by-product, the economics of Group I plants is improving. Eventually this should halt the decline in Group I supply. Secondly, the rising value of brightstock will cause a dampening in the demand of products which are blended using this basestock. PCMO and HDMO monogrades are used primarily in the bottom tier of the market due to their lower price point. If this economic rationale is erased, this market segment would be motivated to scrap their old vehicles and shift to other lower cost options. The parallel for this phenomenon is the disappearance of vacuum tube radios because spare parts were no longer available. Thirdly, the rising value of brightstocks will drive the search for substitutes. In-fact many substitutes are fighting for a share of the market that will be vacated by brightstocks.

Bright future for brightstock substitutes?
There are a number of substitute products for brightstocks. These include: polyisobutene (PIB), polyalphaolefins (PAO), polyalkene glycol (PAG), and naphthenic brightstocks among other products. Though each is imperfect from a technical and economic fit, PIB and naphthenic brightstocks appear to have the most potential for substitution.

PAO is unlikely to be a major substitute due to its price, availability issues, as well as the fact that PAOs are generally not produced in very high viscosity ranges. While PAG is available in high viscosity range, the product is very expensive and not compatible with PAO and PIB. PAGs as a result are used mainly in high end compressor fluids and other such applications.

PIB is a logical synthetic substitute for brightstocks. PIB is available in very high viscosity ranges and as a result a 1:1 substitution is not necessary. PIB has better viscosity index (VI), better oxidative stability. On the other hand PIB has lower solvency compared to brightstock and in recent times, its availability has become quite tight. PIB is already used in two-stroke engine oils, monograde engine oils, marine oils, and grease. The demands on PIB from the lubricants industry will grow in the future primarily as a precursor for dispersants and as a VI improver. Thus the competition for this material is likely to heat up.

Naphthenic basestocks suppliers have for sometime looked at the emerging opportunity for brightstock replacement. Naphthenics capacity expansions are specially targeted towards the “heavy” end of the market. For example, Ergon’s expansion last year included a 250 KT capacity for 2,000 SUS material and heavier. Nynas and CNOOC have also announced capacity expansions in the next few years, much of which will be for heavy grades. Naphthenic brightstocks have made in-roads in marine oil formulations. Similar to the PIB market condition, there are numerous applications competing for heavy viscosity grades. Rubber and tire oils and printing ink applications compete with brightstock replacement applications for heavy naphthenic basestocks. Of all substitutes, naphthenic brightstocks are the most economical. On the other hand, they have a lower viscosity compared to brightstock and their supply is likely to be tight given the other applications competing for this material.

It is unlikely that any one material will capture all of the substitution opportunity, simply because each material is constrained by supply and / or economics. Some demand contraction is likely to happen for brightstock applications driven by the high cost of the material. Among the applications that continue to exist, PIB and naphthenic basestocks will likely be the chief substitutes, with PAO and PAG being used in niche applications which can support the high price of these materials.