The base oil is used in the manufacturing of industrial lubricants such as grease, motor oils, and metal processing fluids. It is produced by refining crude oil at a varying boiling point through the process of hydro-cracking. The base oils are categorized into four groups depending on the level of viscosity, operational temperature, and saturates present. The mineral-based oils comprise of Group I, II, and III, while Group IV and V are synthetic base oils. The Group I and II are the most commonly used base oils for industrial operations. The largest global end-user industries for base oils are automotive and industrial machinery. The end-user industries make changes in the compositions of base oils by using additives so as to achieve specific consistency and operational temperature in the oils.
The market for base oil is growing at a steady rate with the development of industries across the globe. As per the base oil market report, the global market for base oil is expected to grow at a Compound Annual Growth Rate (CAGR) of 3 percent and is to remain the same till the year 2022. The growth of the market is majorly driven by the demand for clear textured lubricants with improved efficiency. The markets in the West constitute the increase in demand for cleaner fuels and highly-efficient lubricants, while the demand for industrial lubricants is on the rise in the Asian markets.
Industry Analysis and Opportunities present in the Base Oil Market:
The main driving force for the growth of the base oil market on a global scale is the development of automotive, industrial, and metals processing industries across APAC and the U.S. regions. The key drivers of demand for base oils comprise of mining and automotive industry with the respective growth rate of 2-3 percent and 3 percent. The growth of this market is expected to be driven by Asian markets in particular, due to rapid growth in its industrial sector. The industrial sector in APAC region is expected to grow at a CAGR of 4 percent for the next few years. The mining activities carried out in countries such as China, Mongolia, and Australia contribute significantly towards the demand for industrial lubricants.
Globally, North America and Asia are the largest base oil supply markets accounting for 39 percent and 50 percent of the total supply of base oils in the world. The top suppliers for base oils are Chevron, Sinopec, Exxon Mobil, and PetroChina GS Caltex. The intensity of rivalry is less among the key suppliers thereby making the base oil market a fairly consolidated market. The suppliers have full control of the value chain starting from the procurement of crude oil. The base oil market might not be lucrative for new entrants due to the high fixed costs involved in setting up the plant. Moreover, base oils do not have any viable substitutes. This means that there is no threat of overruling and market domination by the other products. Therefore, a consolidated market with less rivalry, unavailability of viable substitutes, and high entry cost for the new entrants maintains the sustainability of the global market for base oil.
Feedstock crude price plays a crucial role in determining the price of base oil and ultimately the profit margins of the suppliers. A higher price of crude oil increases its procurement cost and simultaneously the price of base oil. However, the feedstock crude price is lower in Asia which implicates a lower price of base oil. This puts the Asian market at a competitive advantage in the global market. Consequently, Asia is expected to become the best cost sourcing destination for Group II base oil in the next few years. The demand for base oil is expected to increase in the European markets in the coming years. With the increase in imports, the European market is soon going to become a lucrative market for exporters.
Another aspect of industry analysis of base oil is identifying its various drivers and constraints. The development of automotive industries and the demand for high-quality industrial lubricants in the Western and APAC markets are key drivers of the growth of global base oil market. Consequently, various capacity additions measures are being implemented in the industries of both in Asia and the U.S. In fact, 30 percent of global suppliers have implemented measures for capacity addition for the production of Group II base oil. The major constraint faced by the base oil market is the huge cost involved in installing high-temperature hydro-cracking units. Moreover, many hydro-cracker units have switched to a cheaper source of feedstock such as ethane which reduces the production of lower cuts in the global market, especially in the European Union.
The global base oil market is able to maintain sustainable growth due to less competition and unavailability of viable substitutes in the market. The demand is expected to grow in coming years with an increase in imports of EU, therefore, providing an opportunity for an economic gain to the suppliers. The key drivers of growth for the base oil market are industries such as automotive and industrial machinery. Contrarily, constraints faced by the base oil industry are mainly in the form of the high installation cost of hydro-cracking units and high procurement cost of feedstock.
Image Source: https://pixabay.com/photos/germany-dortmund-zeche-zollern-2284072/