The quality of used oil is improving — a positive for both the lubricant industry and the environment. The lubricant industry’s shift toward higher-quality base oils, such as Group II and III, results in higher-quality used oil generated at the end of its service life. This, combined with better collection practices and infrastructure, gives rise to better-quality feedstock for re-refineries and improved re-refined products. At the same time, driven by the global focus on sustainability and a circular economy, interest in used oil is growing, especially with regard to re-refining it to base oils.
But despite those positive developments, there are obstacles on the road to achieving sustainability. What are they, and where do we see the industry heading?
“COVID-19 dealt the used-oil industry a serious blow, with oil changes — particularly for passenger vehicles — put on hold,” says Kunal Mahajan, Project Manager in Kline’s Chemicals & Energy practice. “The result was a domino effect — the demand for lubricants declined, which impacted used-oil generation.” The pandemic also adversely affected the collection and disposal of used oil, given the complete halt or major scaling back of operations.
In addition, most developing countries, such as India, Russia, and Brazil, dispose of their used oil illegally, impacting the amount of used oil available for re-refining. Many countries, such as Japan, Thailand, and South Korea, do not have any re-refineries, resulting in a lower share of re-refining in the overall used oil collected.
Further, most of the used-oil re-refineries are currently producing Group I base oils. With current demand shifting toward Group II and III base oils, the potential market for re-refined Group I base oils is shrinking. This is particularly true for re-refiners in Europe, where Group I base oils account for more than two-thirds of the re-refining capacity. However, this issue is being addressed through the growth of Group II and III base oil re-refining capacity in this region.
China faces the same issue — Group II and III base oils account for the vast majority of demand, yet all the re-refineries except one are producing Group I re-refined base oils. Other countries in Asia will soon face the identical issue. Although most of the other countries in Asia are also producing re-refined Group I base oils, and Group I demand in these areas is high, the demand is similarly shifting toward Group II and III base oils in these countries.
In comparison, the United States is more advantageously positioned, as most of its re-refineries are already producing Group II base oils. In Brazil, the largest re-refinery is producing Group II base oils. Nevertheless, there is a shortage of re-refining capacity in the United States, with the same being true in Canada and Western Europe. The re-refineries in these regions are almost fully utilized; thus, unless new re-refining capacity is added, there is limited ability to increase re-refining. Capacity additions are planned in these regions over the next five to 10 years, which will lead to increases in used-oil re-refining.
Lastly, an oversupply of virgin base oils will ensure that base oil prices remain low, which could lead to lower profitability for used-oil re-refiners.
The Road Ahead
Mahajan believes that the used-oil generation rate in the long term will be flat despite growth in the short term. The demand for automotive lubricants is expected to show limited increases and may even decline in the long term as the adoption of electric vehicles gathers momentum and engine efficiency improves. Used-oil collection is expected to show some growth over this same time span, due to better implementation of regulations and improvement in the collection infrastructure.
The two top methods of global disposal for used oil between 2025 and 2030, believes Mahajan, will remain fuel and re-refining to base oil. Additionally, while he sees the share of disposal of used oil as fuel declining between 2021 and 2030, Mahajan looks for the share of re-refining to increase during this same period, largely due to the growth of re-refining in China. He also expects to see re-refining growth in the United States, Western Europe, and Brazil during this same period of time.
For more information on the subject, check out Kline’s just-published Global Used Oil and Re-Refined Lubricants: Market Analysis and Opportunities report. A comprehensive analysis of the global used oil and re-refined lubricants industry in the wake of record low crude oil prices and low base oil demand due to COVID-19, it focuses on key trends, developments, changes, challenges, and business opportunities.