Global Used Oil Markets and Re-refining Industry On the cusp of growth? A presentation at: 21-22 October 2010 Vienna www.klinegroup.com
Introduction This presentation is based on Kline s s recently completed study covering used oil markets and re- refining industry around the world. 1
Re-refined basestocks supply accounts for under 5% of the total lubricant market at present 2
Global lubricant demand in 2009 was estimated at around 33 million tons* Rest of World 18% Regions North 27% HDMO 24% Products Metalworking Fluids 6% Ind Engine Oils 7% Process Oils 12% Asia Pacific 36% Latin 8% Western Europe 11% PCMO 21% Total: 33 Million tonnes* Other auto 10% Gen Ind Oils-b 20% a- Includes industrial hydraulic oils, gear oils, turbine oils, refrigeration oils, compressor oils, industrial greases, way oils, rope oils, and others. * Since the completion of this study, estimates for overall market have been revised to 35 million tons. The analysis here is based on a global market of 33 million tons. 3
Potential used oil generated globally was about 22.4 million tons in 2009 Million tons 10 8 About 10.5 million tons of lubricant volume is lost due to evaporation, leakages, spills, re-use to extinction, and other such factors. 6 4 2 0 HDMO PCMO Other auto Gen Ind Oils Ind EO MWF Process oils Lube demand Used oil generated 4
Million tons Of the total used oil generated, only about 16.5 million tons was collected with the balance lost in unknown end-uses 10 8 6 4 2 0 Asia Pacific North Western Europe South Rest of World Used oil generated Used oil collected 5
Of the total used oil collected, only about 2.6 million tons is sent for re-refining Re-refining 16% Other 6% Fuel 78% Total: 16.5 Million tonnes 6
Of the total used oil sent for re-refining, just about 1.6 million tons of re-refined basestocks are produced Other* 39% Re-refined basestocks 61% Total: 2.6 Million tonnes * Other products produced from re-refining process including naphtha, diesel, asphalt etc 7
To summarize, of a total finished lubricant demand of 33 million tons, about 1.6 million tons of re-refined basestocks are produced Used oil generation Used oil collection Used oil disposal 31% 69% 74% 26% 78% 16% 6% Used oil generated Lubricant lost or not classified as used oil Not collected Collected Used oil re-refining Used as fuel Other Re-refined Finished lubricant: 33 million tons Re-refined basestocks: 1.6 million tons 39% 61% Re-refined basestocks Other* * Other products produced from re-refining process including naphtha, diesel, asphalt etc 8
Used oil handling practices vary significantly by region. Western Europe leads in re-refining 100% 80% 60% 40% 20% 0% Asia Pacific North Western Europe South Rest of World Fuel Re-refining Other 9
Due to strong focus on re-refining, Western Europe accounts for more than 40% of the global re-refined basestock supply South 11% Asia 13% Rest of World 9% Western Europe 43% North 24% Total: 1.6 million tons 10
As the supply of re-refined basestocks grows, it will be important to understand where these basestocks can be used 11
Factors influencing use of re-refined basestocks demand Technical feasibility Which products can be blended with re-refined basestocks? Which cannot? Acceptance by lubricant industry stakeholders OEMs Global major lubricant marketers Mid-tier / independent lubricant marketers Blenders of private label and un-branded products Marketing focus of re- refiners Finished lubricant sales Basestock sales Closed loop re-refining Lubricant end-user perceptions Installers and DIY On-highway and off-highway fleets Industrial customers 12
Global re-refined basestock addressable market by region, 2009 Rest of World 20% Western Europe 11% North 23% Asia 37% South 9% Total: 7.3 million tons 13
Growth in the re-refining industry is influenced by a number of drivers and challenges 14
$ / bbl 250 Driver 1: Strengthening virgin basestock prices have increased interest in re-refined basestocks Interest is strong among large on-highway and off-highway fleets 200 150 100 50 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 WTI Crude Group I 150N (FOB USGC) Source: ICIS Pricing, EIA 15
Driver 2: With improvements in re-refining technology, nearly 20% of the global re-refined basestock supply in Group II quality This expands the universe of products that can be blended with re-refined basestocks Group II 18% Group I* 82% Total: 1.6 million tons * Includes re-refined naphthenic basestocks 16
Driver 3: The growth of the re-refining industry has also been aided by favorable regulation Western Europe has the strongest regulation for used oil collection and disposal in a responsible manner Five step hierarchy gives preference to re-refining over other disposal routes 0.12 0.10 Used Oil Collection Levy ($/kg)-a North has strong regulation covering collection, testing, labeling, and disposal of used oils, however, no preference for re-refining US EPA, in-fact, allows use as fuel in space heaters that don t exceed 0.5 Million BT / hour 0.08 0.06 0.04 0.02 In South, Brazil has strong regulation favoring re-refining All suitable collected oil must be rerefined In other parts of the world (with exception) regulations exist, but enforcement is weak 0.00 Portugal Finland Spain France US-b Canada Australia a- Charged on sales of lubricants which generate used oil b- Applicable only in California 17
% Challenge 1: Lopsided regional development is a potential weakness of this industry As Western Europe re-refining capacity increases further, the competition for used oil purchases and sales of re-refined basestocks will intensify 100 80 60 40 20 0 Western Europe South North Asia Pacific Rest of World Western Europe South North Asia Pacific Rest of World Share of used oil sent to re-refining Supply of re-refined basestocks as %of addressable demand 18
Challenge 2: Scale and structure of re-refining industry not aligned with needs of major blenders Small plants 1/10 th the size of virgin basestock plants No industry-wide standardization in product specifications Local and regional availability only Difficult for global majors to incorporate re- refined basestocks in their blends, even if they are favorably disposed to using them! Conclusion: Global lube majors are unlikely to be key clients? 19
Challenge 3: Negative end-user perceptions about re-refined basestocks is a major road-block to wide spread use Lack of familiarity Confusion on what constitutes re-refining End-users club modern re-refining technology with outdated separation processes which were not very effective End-users (especially in Asia) equate re-refined basestocks with adulteration, spurious products, and low quality % 40 30 Reasons for not using re-refined refined basestocks (Sample = 229) 20 10 0 Not aware or never been offered Quality and performance concerns Policy Existing tieups Suitable products not available Concerns on supply consistency Other Source: Kline survey of non-users of re-refined lubes 20
So, what is the re-refining industry outlook? Is the re-refining industry in Western Europe approaching its optimal size? Is North on the cusp of a growth spurt? Growing interest in re-refining, but will it sustain? Will modern re-refining take-off in Asia? Industry is unlikely to receive strong regulatory support as it has in Western Europe and North Re-refining in Asia can thrive if it can make strong business case GLOBAL RE-REFINING REFINING INDUSTRY OUTLOOK, 2009-19 Million tonnes 12 10 CAGR (2009-19): 2.7% 8 6 4 CAGR (2009-19): 6.3% 2 0 2009 2014 2019 Addressable demand Supply 21
Kline is a worldwide consulting and research firm dedicated to providing the kind of insight and knowledge that helps companies find a clear path to success. The firm has served the management consulting and market research needs of organizations in the chemicals, materials, energy, life sciences, and consumer products industries for over 50 years. For more information, visit www.klinegroup.com. If you require additional information about the contents of this document or the services that Kline provides, please contact: s Asia Europe Milind Phadke Industry Manager, Energy +1-973-435-3379 Milind.Phadke@KlineGroup.com Kline & Company, Inc. 35 Waterview Blvd. Suite 305 Parsippany, NJ 07054 Phone: +1-973-435-6262 Fax: +1-973-435-6291 www.klinegroup.com 22