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PAO Slugs it Out With Group III

5 May 2000

PAO Slugs it Out With Group III; TKO Expected, But in What Round?

           The Days of Double-digit Growth for PAO May Be Numbered

    LITTLE FALLS, N.J., May 4 According to a study just
published by Kline & Company, titled SYNTHETIC LUBRICANTS AND FUNCTIONAL
FLUIDS, 1999 TO 2004, the real story in synthetic lubricants is not about
volume; it's about the battle between API Group III basestocks and
polyalphaolefins (PAO).  According to William Downey, vice president with
Kline & Company, Inc., a management consulting firm based in Little Falls, NJ,
"Group III basestocks have already taken a big bite out of the synthetic
lubricants market in passenger car motor oil (PCMO)."  Downey notes that "two
leading marketers of PCMO recently switched from PAO to Group III in their
'synthetic' PCMO formulations, and others are likely to follow."  These two
switches alone accounted for approximately 5 million gal -- a prize for Group
III that came at the expense of PAO.
    According to Downey, three primary factors drive switches from PAO to
Group III.  The first is cost, and the second is a recent ruling by the
National Advertising Division (NAD) of the Council of Better Business Bureaus.
The third is an increase in the availability of Group III basestocks.
    From a cost position, Group III has been a threat to PAO for nearly a
decade.  At today's prices, the basestock component of a synthetic PCMO using
PAO costs blenders more than the cost for a Group III approach.  Group III
clearly has a cost advantage over PAO in automotive engine oil applications.
"Cost advantage alone, however, was not enough to dethrone PAO," says Downey.
    Until recently, PAO was virtually the only basestock allowed to wear the
"synthetic" label.  This was changed, however, when the NAD was asked to
challenge Castrol's use of the "synthetic" label on its reformulated PCMO made
with Group III.  A ruling in favor of Castrol was reached, and Group III was
unceremoniously accepted into the fold as a "synthetic."  According to Downey,
"If, and how quickly other lubricant suppliers replace PAO with Group III,
depends in part on the availability of Group III and price stability.
However, all signs point to a continuing erosion of PAO's market share in
PCMO."
    Kline's study, SYNTHETIC LUBRICANTS AND FUNCTIONAL FLUIDS, 1999 TO 2004,
also states that Group III will compete heavily with PAO in synthetic blends
and as a performance-enhancing blendstock in 5W-30 and 10W-30 PCMO.  Cost is
also expected to favor Group III in these applications.  According to the
study, a pessimistic case scenario for PAO includes its replacement of PAO
with Group III in virtually all PCMO applications.  Furthermore, Group III
will make significant inroads into heavy-duty motor oil applications and
transmission fluid.
    The outlook for PAO in industrial applications is more positive, even in
the pessimistic case scenario presented in the study.  Downey notes that
"Industrial applications in which PAO is currently used can be very demanding
in terms of temperature extremes and exposure to contaminates.  Due to these
factors and the critical nature of some applications, PAOs offers important
performance advantages over Group III in some industrial applications."
Downey concludes by stating that:  "Industrial applications account for nearly
50% of the lubricants consumed in the United States, and this segment offers
PAO suppliers an opportunity to recover some of its losses in the automotive
market segment."