Global Naphthenic Basestocks Market at a Crossroads

Naphthenic basestocks: A vital blending component for several industrial lubricants

Naphthenic basestocks, classified under the American Petroleum Institute’s (API’s) Group V category, have remained a niche, yet important, basestocks category. Per a recently completed market study by Kline – Global Lubricant Basestocks: Market Analysis and Opportunities – naphthenic basestocks represented around 10% of the global demand in 2019. This market share has remained at an almost constant level over the past decade.

Naphthenic basestocks offer certain advantages including their wide range of viscosities and high additive solubility. This has helped them establish their own demand in industrial lubricants. However, owing to their low viscosity index (VI), naphthenic basestocks are rarely used in automobile applications, aside from greases.

Per Kline’s analysis, the top applications for naphthenic basestocks include rubber process oil (RPO), metalworking fluid (MWF), electrical insulation oil (EIO), and greases. Besides these, naphthenic basestocks can be used in a host of general industrial oil (GIO) applications where VI is not a key consideration. They can also be used in applications like printing inks, spray oils, adhesive and sealants, and explosives, among others.

As stated above, naphthenic basestocks are commercially available in a wide range of viscosities; they range from 35 SUS to as high as 5,000 SUS, providing them with an edge over basestocks that have a limited viscosity range. Furthermore, their high solubility makes them a preferred basestock in applications like MWF and greases, where additive solubility is critical. In EIO applications, naphthenic basestocks are mainly preferred for their good low-temperature performance compared to paraffinic basestocks. In RPO applications, they are preferred due to their non-carcinogenic nature.

Bearing the brunt of COVID-19

Some of the key applications of naphthenic basestocks, including metalworking fluids and rubber process oils, have been badly impacted due to the COVID-19 outbreak. Automobile production across the world has declined considerably, reducing the demand for MWF, which is one of the key application segments for naphthenic basestocks. Demand for RPO has also declined sharply, as tire sales are down due to the poor automobile sales. Further, naphthenic basestocks are additionally used in processing elastomers, which are widely used in automobiles.

On the other hand, demand for naphthenic basestocks in EIO applications was relatively insulated, providing a cushion to help contain the shock of the decreased demand. Per Kline’s estimates, the global naphthenic basestock market may register a decline of around 10%-15% in 2020, owing to the COVID-19 outbreak.

Potential market opportunities

Naphthenic basestocks are being considered favorably as a substitute for Group I basestocks, which have dwindled in supply over the past decade. As Group I basestocks continually become obsolete for use in automotive engine oil applications and compete against Group II and III basestocks, a dip in demand has forced a lot of capacity to shut down. This created Group I availability issues for applications where Group II and III basestocks were not technically suitable, despite having surplus availability. This void can be easily bridged by naphthenic basestocks.

Globally, the challenges for Group I plants have not subsided. Rather, they face more obstacles than ever, magnified by new developments like IMO 2020 regulations. The COVID-19 outbreak in early 2020 sent global lubricant demand southwards, severely impacting operations of Group I basestocks, which had already been operating at their historically lowest average rates globally. Thus, this demand erosion has resulted in even greater challenges for Group I plants. It is anticipated that the pace of Group I capacity rationalization will accelerate in the future, especially if Group II/II+ capacity additions continue unabated across the world.

Naphthenic basestocks can also be used in formulation with Group II basestocks to mimic Group I basestock properties. This solution, although still in its nascent stage, can greatly solve the issues arising from a Group I short supply in the future. However, this solution will be more palatable to blenders only if it does not require a high cost of reformulation and there is an imminent Group I supply disruption.

Facing challenges of its own

Over the past several years, naphthenic basestocks have cemented their position in several lubricant formulations as a key substitute to Group I basestocks, which, again, have been facing dwindling supplies. Per Kline estimates, the global supply for naphthenic basestocks stood at 3.6 million tonnes compared with a total capacity of around 5.8 million tonnes. This indicates that the global naphthenic basestocks capacity remains underutilized, at just over 60% of average operating rates. Thus, the naphthenic basestocks market has sizeable bandwidth to cater to new demand growth.

Global Naphthenic Basestock Capacity by Region, 2019

While opportunities for naphthenic basestocks exist in the market, naphthenics face several challenges of their own, with one of them being the limited availability of naphthenic crude, which limits geographic spread of naphthenic basestocks production. The bulk of the naphthenic basestock production is centered in a handful of countries, including the United States, China, Japan, Sweden, Germany, and Brazil. Venezuela also has some capacity to produce basestocks, but its lone plant has remained non-operational for a few years now. Therefore, naphthenic basestocks do not have a wide geographic production base. Moreover, only a handful of North American and European producers actively participate in the export markets. Much of the production from China and Japan is consumed within these countries. The smaller number of supply options does not sit favorably with blenders, who would like to ensure continuity in availability and plan for unforeseen exigencies and outages in supply.

One major factor recently impacting the naphthenic basestocks market was the restrictions faced by Nynas owing to Venezuela Sanctions Regulations by the United States government. Petrόleos de Venezuela S.A. (PDVSA) had a majority stake in Nynas, resulting in Nynas falling under the purview of these sanctions. This created not only crude availability issues for Nynas, which operates two naphthenic plants in Europe, with a total production capacity of 730-740 kilotonnes per year, but also banking issues, which came bundled with the sanctions. To escape the sanctions, Nynas restructured its ownership by reducing PDVSA’s share to around 15% from the previous 50%. In addition, Nynas has completely switched away from Venezuelan crude as they increased share of other sources in their crude oil mix. This development, involving normalization of operations, is positive for the naphthenic market, as the supply availability prospects are strengthened. During the period of sanctions, several lubricant blenders who used naphthenic basestocks started becoming wary of the looming uncertainty.

Earlier last year, LyondellBasell shut its naphthenic plant in the United States following the expiration of its sales contract with Calumet. The plant had a capacity to produce around 180 kilotonnes per year of naphthenic basestocks. Petrobras, which operates a naphthenic plant in Lubnor, Brazil, with a capacity of 65-70 kilotonnes per year, had been considering selling this refinery as part of its divestment plan. However, the outbreak of the COVID-19 pandemic could delay these plans.

The road ahead

It is widely expected that the global finished lubricant market, after registering a sharp decline in demand in 2020, will gradually inch toward recovery. In fact, the trough created due to lockdowns across the world is well past and the markets have already begun their recovery, though it may take some time before the market demand normalizes to reach pre-COVID-19 levels. Furthermore, the market is replete with uncertainties that may impact the road to recovery. Nonetheless, the long-term market prospects for naphthenic basestocks are stable owing to the anticipated vacuum created by Group I supply reduction and the recovery in finished lubricant demand.

Some applications that are in nascent stages are also being looked upon as potential new growth segments for naphthenic basestocks. One such application is in the production of battery separators. This application specifically holds the key, given the growing thrust on adoption of electric vehicles across the world.

One of the most critical factors for growth in naphthenic basestocks going forward will be the assurance of a continuous supply. To ensure continued growth, naphthenic basestock suppliers will need to make sure that blenders remain confident about this aspect.

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