Summary
As the US Diesel market switches to mostly ULSD, commercial users are accelerating their rollover to the lower sulfur fuel. The railroad lubricant market has historically been slow changing due to the large capital investments in locomotives and a long history of reliable operation with current technologies. The switch to ULSD will provide additional sales opportunities to the lubricant and diesel additive suppliers as they introduce additional components to compensate for the loss of intrinsic sulfur's fuel lubricity.
Analysis
The EPA, by forcing truck and light duty diesel stations to supply only ULSD fuel, has laid the groundwork for a complete rollover of the diesel and heating fuel market. Refiners have installed the desufurization equipment and adjusted their operations to emphasize the large road transportation segment, making production for currently non regulated uses such as railroad diesel less attractive. The switch was to be enforced for railroad in 2013 but Metro North will switch in 2008.
Removing virtually all the sulfur from diesel permits not only reduction of the "diesel smell" but significantly reduces acid emissions. Sulfur removal also allows reduction in NOx and soot by extending the emissions system performance and operating life.
The downside in the loss of sulfur's intrinsic fuel lubricity which must be compensated by additional additives in the fuel and lubricant. The new formulations will provide not only additional additive volumes, but will open up the railroad market to market share shifts as the additive suppliers respond with modified railroad formulations. These new formulation should provide oil and engine lifetimes comparable to or better than today's oil and high sulfur fuels.
Among the publicly traded additive suppliers, Innospec will likely receive the most benefit from the increased fuel lubricity additive volumes due to their current large share in diesel additives. Lubrizol should benefit the most from any railroad lubricant additive share shift due to its strong technology position and experience in the railroad market.
