What can the base oils industry expect after a turbulent year?
Since March 2020, the base oils industry has been going through one of its most challenging periods. As an industry, we should avoid focusing on doom and gloom and instead see the possibilities ahead. But what can we expect from the future outlook for our industry more broadly? And what do lubricant blenders need to seek in a partner going forward?
Last year was difficult for every individual and every industry. In the lubricant market, the COVID-19 pandemic caused considerable volatility in the demand for lubricants and disrupted the production and supply of base oils and additives.
The lubricant markets are transitioning to lower viscosity and better performing engine oils, creating the need for better quality base oils such as Group II, Group III, Group III+ and PAOs. When the pandemic hit and the lockdowns began in Q2 of 2020, there was an unprecedented drop in demand for all oil-based products, but especially transportation fuels. Specifically, for GIII base oils, the closure of many automobile manufacturing plants resulted in an immediate halt of just-in-time first-fill lubricants. Neste experienced a drop in demand of nearly 50% for Q2 of 2020.
So how do refineries respond to an instantaneous and severe drop in demand for fuels? By reducing run rates to the minimal safe level of operations and scheduling downtime for maintenance. And what is the resulting impact on the global base oil market? Less feedstock for production and reduced capacities, across all qualities of base oils from GI to PAOs.
But in the lubricant market, somewhat unexpectedly, demand returned to near 2019 levels in Q3 and Q4. This was driven by the return of solid auto production figures and reduced use of public transportation. Thus, strong lube market demand combined with reduced base oil production rates, weather-related outages and shortages of additive components has led to severe market volatility.
Product availability and transparency remain important to our customers
COVID did have an impact on Neste operations and production. Our Q2 2020 Porvoo plant maintenance work was limited to those items that could be conducted safely and would ensure reliable operating conditions for another year. And we were forced to reschedule much of the work until 2021. Since last autumn, we have carefully managed our sales to ensure we can meet our customer demands while building inventory to cover the Q2 2021 Porvoo turnaround period.
Throughout 2020 and 2021, we continuously worked with our customers to understand how to best match our supply capacities to their demands. We focused on active and transparent communications about expected supplies of particular grades to allow our customers to optimize their operation plans and production scales. Our customers were treated equally in terms of product allocations, and we gave them advance notice of changes to support their own production planning.
But that is precisely how we have always operated. We have always worked closely with customers – from new product development and quality control to operations and customer service, communication is key.
Are we entering a new age of volatility?
What is the difference between this recent volatile period and others caused by financial crises or natural disasters? A major difference between this turbulence and past marketplace shakeups is that we do not expect growth to return to older, lower performing products.
COVID will continue to create volatility in the near future. Over a slightly longer time horizon, renewables will become a bigger portion of the energy pie, as the demand for fossil fuels like diesel and gasoline shrinks and more electric and hybrid vehicles enter the market. More companies, nations and economies will set sustainability and carbon neutrality goals and policies. The question to be answered is do we need the level of traditional refining capacity that exists today?
The movement towards performance, efficiency, sustainability and long life has only grown stronger in the passenger car and heavy-duty engine markets. This requires certain higher-performance base stocks and added componentry. Group II, Group III, Group III+ and PAOs will be needed to meet technical performance requirements. And look to low carbon, neutral or even carbon negative renewable base oils aid in achieving both sustainability targets and technical performance demands. That means better performance, but not a larger overall lubricant market. And as a consequence of the increasing electrification of the automotive industry, fewer cars will run on fossil fuels. This impacts the long-term overall demand for gasoline and diesel, which again impacts the economics of refining and could lead to more refinery closures.
Additionally, many major oil companies are increasingly aiming to become carbon neutral. For example, we at Neste are committed to reaching carbon neutral production by 2035. Many other companies have announced aggressive carbon neutral timelines and sustainability programs. All of this places demands on aspects of traditional base oils production and can therefore lead to volatility. I believe this global rebalancing act will be playing out over the next decade.
But our industry should take these developments as an opportunity.
Lubricants are becoming very specialized products with a broader purpose. By increasing performance, they contribute broadly to the sustainability goals of companies and economies. Lubricants can reduce emissions and enable better fuel economies, and their value in this area deserves recognition. Reducing friction is important in nearly every industry as well as society!
What should lubricant blenders expect from a partner?
The core focus of lubricant blenders in finding a partner should be identifying products needed to meet the transition in the lubricant market towards long lasting, low volatility, low viscosity engine oils. Lubricant blenders should also look for guidance in understanding the changes in the marketplace. This means finding a partner with a clear view of the necessary specifications and performance characteristics of a base oil as well as its impact and benefit in meeting environmental regulations and sustainability goals. A strong partner can help in understanding where the industry is headed and what the future demands will be for performance and reliability and aid in fulfilling sustainability goals and carbon neutral policies worldwide.
Mutual strategic alignment and shared values cannot be ignored. Lubricant blenders benefit from a partner that shares common strategic goals. This can put businesses in the best possible position to evolve and turn the market demands of tomorrow into a competitive advantage.