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Global Used Oil Markets and Re-refining

Industry
On the cusp of growth?

A presentation at:

21-22 October 2010


Vienna

www.KlineGroup.com
© 2010 Kline & Company
Introduction

This presentation is based


on Kline’s recently
completed study covering
used oil markets and re-
refining industry around the
world.

© 2010 Kline & Company 1


Re-refined basestocks supply accounts for under
5% of the total lubricant market at present…

© 2010 Kline & Company 2


Global lubricant demand in 2009 was estimated at around
33 million tons*…
Regions Products
Metal- Ind
working Engine
Rest of Fluids
North Oils
World 6%
America HDMO 7%
18%
27% 24% Process
Oils
12%

Latin
America
Asia PCMO
8%
Pacific 21%
Western Gen Ind
36% Europe Other Oils-b
11% auto 20%
10%
Total: 33 Million tonnes*
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.

© 2010 Kline & Company 3


Potential used oil generated globally was about 22.4
million tons in 2009…
Million About 10.5 million tons of lubricant volume is lost due
tons 10 to evaporation, leakages, spills, re-use to extinction, and
other such factors.
8

0
HDMO PCMO Other Gen Ind Ind EO MWF Process
auto Oils oils

Lube demand Used oil generated

© 2010 Kline & Company 4


Of the total used oil generated, only about 16.5 million tons
was collected with the balance lost in unknown end-uses…
Million
tons 10

0
Asia Pacific North America Western South Rest of World
Europe America

Used oil generated Used oil collected

© 2010 Kline & Company 5


Of the total used oil collected, only about 2.6 million tons
is sent for re-refining…

Other
6%
Re-refining
16%

Fuel
78%

Total: 16.5 Million tonnes

© 2010 Kline & Company 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

© 2010 Kline & Company 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 Used oil Used oil
generation collection disposal

16%
31% 26%
78%
69% 74%
6%

Used oil generated


Used as fuel Re-refined
Lubricant lost or not classified as Not collected Collected
Other
used oil
Used oil
re-refining

Finished lubricant: 39%


33 million tons
Re-refined basestocks: 61%
1.6 million tons
* Other products produced from re-refining
Re-refined basestocks process including naphtha, diesel,
asphalt etc
Other*
© 2010 Kline & Company 8
Used oil handling practices vary significantly by region.
Western Europe leads in re-refining…

100%

80%

60%

40%

20%

0%
Asia North Western South Rest of
Pacific America Europe America World

Fuel Re-refining Other

© 2010 Kline & Company 9


Due to strong focus on re-refining, Western Europe
accounts for more than 40% of the global re-refined
basestock supply…

Rest of World
9%
Asia
13% Western
Europe
43%

South
America
11%

North
America
24%

Total: 1.6 million tons

© 2010 Kline & Company 10


As the supply of re-refined basestocks grows, it will
be important to understand where these basestocks
can be used…

© 2010 Kline & Company 11


Factors influencing use of re-refined basestocks demand

Which products can be blended with re-refined


Technical feasibility basestocks? Which cannot?

Acceptance by OEMs
Global major lubricant marketers
lubricant industry Mid-tier / independent lubricant marketers
stakeholders Blenders of private label and un-branded products

Finished lubricant sales


Marketing focus of re- Basestock sales
refiners Closed loop re-refining

Installers and DIY


Lubricant end-user On-highway and off-highway fleets
perceptions Industrial customers

© 2010 Kline & Company 12


Global re-refined basestock addressable market by
region, 2009

Western
Rest of
Europe
World
11%
20%

North
America
23%

Asia South
37% America
9%

Total: 7.3 million tons

© 2010 Kline & Company 13


Growth in the re-refining industry is influenced by a
number of drivers and challenges…

© 2010 Kline & Company 14


Driver 1: Strengthening virgin basestock prices have
increased interest in re-refined basestocks…
Interest is strong among large on-highway and off-highway fleets…
$ / bbl
250

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

© 2010 Kline & Company 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
© 2010 Kline & Company 16
Driver 3: The growth of the re-refining industry has also
been aided by favorable regulation…
ƒ Western Europe has the strongest regulation Used Oil Collection Levy ($/kg)-a
for used oil collection and disposal in a
responsible manner 0.12
− Five step hierarchy gives preference to
re-refining over other disposal routes 0.10

ƒ North America has strong regulation 0.08


covering collection, testing, labeling, and
disposal of used oils, however, no 0.06
preference for re-refining
− US EPA, in-fact, allows use as fuel in 0.04
space heaters that don’t exceed 0.5
Million BT / hour
0.02
ƒ In South America, Brazil has strong
0.00
regulation favoring re-refining

Finland

Australia
Portugal

Spain

US-b
France

Canada
− All suitable collected oil must be re-
refined

ƒ In other parts of the world (with exception)


a- Charged on sales of lubricants which generate
regulations exist, but enforcement is weak used oil
b- Applicable only in California

© 2010 Kline & Company 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 South North Asia Rest of Western South North Asia Rest of
Europe America America Pacific World Europe America America Pacific World

Share of used oil sent to re-refining Supply of re-refined basestocks as %of


addressable demand

© 2010 Kline & Company 18


Challenge 2: Scale and structure of re-refining industry
not aligned with needs of major blenders

ƒ Small plants 1/10th the size of virgin basestock plants

ƒ No industry-wide standardization in product specifications

ƒ 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?

© 2010 Kline & Company 19


Challenge 3: Negative end-user perceptions about re-refined
basestocks is a major road-block to wide spread use
ƒ Lack of familiarity

ƒ Confusion on what constitutes re-refining


− End-users club modern re-refining technology with outdated
separation processes which were not very effective

ƒ End-users (especially in Asia) equate re-refined basestocks with


adulteration, spurious products, and low quality
Reasons for not using re-refined basestocks (Sample = 229)
40
%
30

20

10

0
Not aware or Quality and Policy Existing tie- Suitable Concerns on Other
never been performance ups products not supply
offered concerns available consistency
Source: Kline survey of non-users of re-refined lubes
© 2010 Kline & Company 20
So, what is the re-refining industry outlook?
GLOBAL RE-
RE-REFINING INDUSTRY OUTLOOK, 2009-
2009-19
ƒ Is the re-refining industry in Western 12
Europe approaching its optimal size? Million
tonnes

ƒ Is North America on the cusp of a


10
CAGR (2009-19): 2.7%
growth spurt?
− Growing interest in re-refining, but
8

will it sustain?
6

ƒ Will “modern re-refining” take-off in


Asia? 4

− Industry is unlikely to receive CAGR (2009-19): 6.3%

strong regulatory support as it has 2


in Western Europe and North
America
0
− Re-refining in Asia can thrive if it 2009 2014 2019
can make strong business case Addressable demand Supply

© 2010 Kline & Company 21


Kline is a worldwide consulting and research firm dedicated Americas
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 Asia
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 Europe
services that Kline provides, please contact: ___________

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

© 2010 Kline & Company 22