Kline, a global market research and management consulting firm specializing in the downstream petroleum and specialties sector, and SBA Consulting, which focuses on global analyses of the base oil market, announced a new joint initiative to analyze the financial performance and survivability for base oil plants with the launch of a client-confidential study called the Base Oil Plant Health Check.
Over the past years, global lubricants consumption has increased only nominally. That slow and uncertain expansion is the product of population and economic growth on one hand, and the inexorable countervailing forces of recycling and greater efficiency in lubricant use on the other. Base oils, the essential raw materials for finished lubricants, naturally follow the changing winds of lubricant demand.
Base oil plants are subject to these same demand forces. However, as in many competitive industries, new capacity is often added by multiple competitors when justified by strengthening margins and consumption. After the economic collapse of 2008/2009, lubricant and base oil markets and margins rebounded, creating the economic incentive for new investment in Group II and III capacity.
The herd instinct drove a frenzy of over-investment in new base oil plants worldwide, which will substantially exceed any likely growth in demand over the first decade of their existence. This base oil plant overbuilding boom, and consequent capacity surplus, has acted to depress operating rates and margins on base oil production. Group I plants are most vulnerable to the new reality because of their low base oil yields, challenging by-products, and relatively high operating costs. As a result, 26 Group I plants, many of them small, have shut down or announced closure plans, during this decade.
However, new Group II/III plant capacity constructed since 2010 has added three times the cumulative total of Group I shutdowns, and so the weakness in base oil plant utilization and profitability remains. The prospects for a dramatic and unexpected surge in global lubricant demand are limited, with supply-side actions being the primary focus of finding solutions to this conundrum.
More capacity must be shut down to bring base oil demand and capacity in more balance. The question is always, “Which plants, and what can we do to ensure that ours is not among them?”
Kline and Stephen Ames, SBA Consulting LLC, have teamed to provide an independent and objective assessment of how base oil plants may perform in the highly competitive environment of the next decade. This Base Oil Plant Health Check study is a proprietary and confidential analysis prepared for individual clients, addressing three fundamental questions:
- Has my base oil plant been profitable in the past, and what are the primary drivers of that performance?
- How will my plant’s performance change in the future, and what are the risks and uncertainties likely to impact that outlook?
- What operational or capital options may exist to improve our plant’s profitability, and which of these have the most impact on improving its competitive position at minimal risk?
“The Health Check will provide each base oil plant owner with a roadmap for maximizing its prospects for financial survival in the future,” said Ian Moncrieff, Vice President of Kline’s Energy Practice and the study’s co-director. “In that respect, it goes well beyond traditional benchmarking studies.”
Details on the Base Oil Plant Health Check study may be obtained by contacting Ian Moncrieff, Vice President of Kline’s Energy Practice, at ian.moncrieff@klinegroup.com or Stephen Ames, Managing Director of SBA Consulting LLC, at sbaconsulting@earthlink.net.
