As a logistical consequence of China’s vast exporting, manufacturing facilities tended to be coastal; however, in an effort to offset declining exports, China is increasingly shifting to a domestic consumption-driven economy and investing significant resources in developing infrastructure within the country’s interior thus encouraging companies to expand and establish a presence to service what were until recently low priority domestic needs. This realignment affords both opportunities and challenges. Backed by government incentives, the hitherto underdeveloped interior of the country is emerging as a new and hungry market. Astute marketers therefore need to employ dual strategies: one for the traditional and more sophisticated developed regions of China, and another for the upcoming interior regions.

Kline’s analysis also finds that China’s state-owned players dominate the market, with PetroChina remaining China’s leading lubricant supplier, claiming approximately 23% of the market mainly due to its strength in the industrial sector, while Sinopec claims a further 20% market share through its dominance of the automotive sector. These and other domestic companies, with their well-established reach and low price points, hold a distinct advantage in servicing the burgeoning lubricant demand and capturing market share. This is reflected by Shell, the leading foreign supplier in China, securing a relatively modest estimated 7% market share. Kline estimates that the combined sales of lubricants by foreign suppliers amount to around 27% of the total volume.

However, great opportunities exist for foreign lubricant suppliers as global companies increase their investments in China and are likely to choose the same or other trusted Western oil suppliers to fulfill their lubricant needs.

With the expectation that the car population in China will grow on average between 18% to 22% per year between 2010 and 2015, and given that most of the large automotive producers in China are multinational or joint venture companies with global sourcing as a common strategy, multinational lubricant producers can fare well by fostering and emphasizing proven and standardized product performance and value-added relationships. Additionally, with the absence of locally produced ATF and the growing popularity of automatic transmissions, there are largely uncontested opportunities for multinational lubricant suppliers to strengthen their position in the transmission oil market.

Due to increased investments in large power generation projects in recent years and further projects anticipated, more imported power generation equipment and other large electrical equipment will be introduced. “It is expected that this will lead to a rapid growth in demand for high-end lubricants in this market segment, with equipment manufacturers stipulating standardized, tested, and trusted fluids,” commented Geeta Agashe, vice president of Kline’s Energy Practice. “This is an opportunity for global majors, such as ExxonMobil, Shell, and BP, who have a strong relationship with the OEMs of imported equipment.”

China’s shifting economy offers considerable opportunities, offering value-added services, specialty, proven, or trusted fluids, and capitalizing upon relationships with OEMs of imported equipment and parent companies, will significantly benefit foreign oil suppliers.

Opportunities in Lubricants 2011: China Market Analysis is a comprehensive analysis of the Chinese lubricant market focusing on market size and growth, quality evolution, key trends, developments, challenges, business opportunities, and threats.

What has been the impact on the global lubricants industry? As per Kline & Company’s estimates, global lubricant consumption peaked in 2007 at about 39.8 million tonnes. Consumption declined by 3.5% in 2008 to 38.4 million tonnes and by a staggering 9% in 2009 to reach 35 million tonnes. Consumption grew by 7% in 2010 to reach 37.4 million tonnes. In 2011, we estimate that the industry grew by 2% to reach 38.2 million tonnes. The economic rollercoaster ride of the past three years has generated a debate on the nature of lubricant demand and its growth in context of economic growth. Does lubricant demand growth track GDP growth rate? Can we define a relation between GDP growth and lubricant growth? Has the lubricant market grown at all in the last 10 to 15 years? Let’s try to lay out our view on these questions.

Does lubricant demand growth track GDP growth rate?
Lubricants permeate every aspect of our life and are needed wherever machines are used. For our convenience, we break down the industry in terms of consumer segment which covers all privately owned cars, SUVs, motorcycles and small engines; commercial segment which covers all trucks, buses, tractors, and other commercial vehicles; and industrial segment which covers lubricants used in machinery in all industries and also includes metalworking fluids used in variety of metal processing industries. If we take a broad time horizon, then lubricant consumption growth should indeed track GDP growth rate given its wide usage. However, there are two caveats. First, not all sectors of the economy use lubricants to the same extent so lubricant demand growth is dependent on which part of the economy is growing. GDP is divided into manufacturing, services, and agriculture. Manufacturing GDP is most lubricant intensive, and services are the least intensive. In most affluent economies (Germany is an exception), GDP growth is primarily driven by growth in services hence the impact on lubricant demand growth is weak. Growth in manufacturing intensive economies will have a strong relation with lubricant growth. The second factor to consider is the degree of mechanization in the manufacturing sector. Many growth economies may have a large manufacturing sector, but their manufacturing is labour–intensive, using less mechanical power and hence less lubricants. As such economies grow, lubricant consumption would show some growth, but this growth would have been much stronger if it were to occur in an economy which is highly mechanized. Similarly, if growth comers from the Agricultural segment it is important to understand if agriculture is primarily mechanized or labour intensive. In our view lubricant demand growth is driven by GDP growth. However, the relation between the two is nebulous and changing based on where economic growth occurs.

Can we define a relation between GDP growth and lubricant growth?
To be able to quantify the relation between GDP growth rate and lubricant demand growth rate, we need a repeatable, consistent measure of “actual” global lubricant demand, as opposed to estimates. Unfortunately, lack of common definitions and spotty reporting by marketers means that we do not have consistent measure of actual lubricant demand. Data is indeed collected by various national associations but the data is strictly not comparable year to year as the list of participants keeps on changing. Also, differences in what is included make comparison between data from two sources difficult. Is process oil included? What about marine oils? How do re-refined oils get counted? Unless we have a robust, repeatable measure of global lubricant consumption covering all market segments (top tier to bottom tier), the correlation with GDP growth rate is not representative of the total market.

Even if we can’t quantify lubricant demand, we can quantify growth. It’s how much more was sold this year compared to the year before. We can therefore track lubricant demand growth with GDP growth and determine if there is a relation, right?
The answer is: maybe. The lubricants industry is very vast in terms of products, market segments, supply chain position, and geography. The growth rate experienced by industry constituents is based on their position. Niches within the total market may have high or low growth rate because of some underlying trend which drowns out the “real” demand growth. For example, an installer may experience a better than average growth rate if there is a significant shift from DIY demand to DIFM demand. Similarly, a Group III supplier may experience strong growth far in excess of the industry growth due to shifts in blending approaches. An additive company may experience a sudden spurt in demand related to the introduction of a new quality level. These market participants would experience some slowing down if the total market declined, but they would not be able make out if this was due to the slowing down of the market trend or slowing of the overall growth.

Due to supply chain effects, growth rates can be all over the place during times of economic turbulence. When growing at a steady pace, the lubricants industry is like a taut railway train with all chugging along at more or less the same pace. When economic growth stalls the impact on different supply chain levels is different. We did see in the latter half of 2008 and early 2009 massive destocking by lubricant marketers. This caused a more rapid contraction in demand for baseoil and additives suppliers than would have been justified by the contraction in the true demand. Similarly during the upswing in second half of 2010, these suppliers benefited from restocking. As a result, during this turbulent period, it would have been difficult for basestock and additive suppliers to relate their business growth to the GDP growth.

Finally, even if there is no special trend in play and no economic turbulence, growth of individual marketers will be higher or lower than the total market depending on whether it is gaining or losing market share. The point is that growth rates of individual market participants are unreliable indicators of overall market growth. The growth rate of the individual market participant may have been influenced by some major market trend unrelated to overall demand. It could also be the case that the company in question is losing or gaining market share.

Has the lubricant market grown at all in the last 10 to 15 years?
We cannot hold both views that lubricant demand tracks GDP growth and that lubricant consumption today is at the same level as it was 10 years ago, for the real GDP has grown in this period.

Between 2000 and 2010, cumulative global passenger car and commercial vehicle production accounted for nearly 718 million new units¹. Even allowing for vehicle scrappage, there has been a big increase in the global vehicle population. Between 2001 and 2011, steel production grew by 408 million tons². Other industrial end-use industries saw similar growth in production levels. Did lubricant consumption remain flat in face of such massive growth in vehicles population and industrial production? To be sure there has been a dampening of lubricant demand due to longer lasting lubricants, lower losses in use due to better equipment design, smaller sump sizes, better housekeeping, better re-refining, and other such factors. However, they have not been enough to cancel out the growth in the underlying demand for lubricants. Innovations such as longer drain engine oils have not spread out to Asia where the cost of insufficient lubrication far outweighs the cost of the lubricant. In our view, global lubricant consumption is likely to exhibit growth due to increasing vehicle population, industrial production and increased mechanization in growth economies. This growth rate will be lower than what you would expect from the build-up of vehicle population and growth industrial production, but still a long way from a flat market.

Finally, a word on our methodology.
Kline measures lubricant demand by a combination of lubricant usage norms (covering crankcase size, drain intervals, and top up demand where applicable) applied to passenger car, motorcycle, and commercial vehicle populations; lubricant usage intensity in different end-use industries; and estimates of sales by major marketers and their market shares. Usage norms in automotive segment and usage intensity in industrial segment are developed on the basis of end-user and installer interviews. Projections are based on growth in end-user segment and any shifts in the usage norms.

What do you think are the important parameters to be considered for estimating lubricant demand? What factors should we look at for projecting demand growth? Please provide your feedback at vera.sandarova@klinegroup.com. We would love to hear from you.

In closing, we wish you a healthy, happy, and profitable 2012!

By Milind Phadke, Industry Manager, Energy

Milind.Phadke@klinegroup.com

We may now see a shift in trade on a similar scale, with the U.S. Gulf Coast, led by Houston, New Orleans, and other ports in the region being the beneficiaries. A potential game changer, as announced by the Wall Street Journal, is the $5.25 billion widening of the Panama Canal scheduled to be completed in 2014. The widened canal will allow the passage of ships carrying twice the cargo as they are able to carry currently. This should open the Gulf Coast to megaships coming in from Pacific ports such as Singapore, Shanghai, Pusan, and others which have traditionally sent their cargos to the U.S. West Coast. Some leading analysts, according to the Wall Street Journal, predict that more than 25% of this traffic could shift to the Gulf and South Atlantic ports.

In addition, Latin America is now home to many of the world’s fastest growing economies including Brazil, with overall growth rates in 2010 exceeding 6%. Increased shipments are expected to come from Latin America to ports such as Houston, Corpus Christ, Brownsville, New Orleans, Pascagoula, and Gulfport-Biloxi.

The global lubricants market is estimated at around 36 million tonnes in 2010. Latin America now accounts for about 7% of the total. Due to the significant growth predicted over the next decade, this region is expected to increase its appetite for lubricants, with marine engine oils playing an important role as a contributor to this growth in demand. This is expected to have a positive impact on the demand for baseoils, lubricant additives, and finished lubricants.

This shift in trade patterns will have an impact on where lubricants are consumed. As per the recently published Kline study, Opportunities in Lubricants, North America, Petroleum Administrative for Defence District (PADD) 3 accounts for 16% of all lubricants consumed in the United States in 2010. Based on all of the changes highlighted above, we expect this number to grow significantly over the next decade.

What impact will these developments have on the supply chains of various participants in the lubricants industry? Would the sales force, technical support, and blend plant locations need to be re-aligned? Astute marketers will be well served to stay on top of these developments, which could have a significant impact on the U.S. lubricants business. Kline will investigate this issue in a FlashPoint report, The Widening of the Panama Canal: Impact on the Lubricants Industry. Please click here if you are interested in this analysis.

Geeta Agashe, VP, Energy

Kline’s study finds that overall, global lubricant demand increased by an estimated 6% over 2009, but still trails pre-recession levels. The market is also getting more competitive with increasingly ambitious NOCs and Independents challenging the IOCs, not only on price, but improved performance of their products. Shell maintained its #1 market share position in 2010, accounting for a 13% market share, followed by ExxonMobil claiming 11%. Shell helped consolidate its dominance by improving its positions in the emerging markets, particularly China, Indonesia, and India, among others, and further developing OEM relations with Daimler, Hyundai, Honda, Suzuki, Renault Nissan, and Chinese OEMs, expecting a “halo” effect from that first-fill leading to after-market sales. ExxonMobil is continuing to focus on the “value” end of the market.

On a per country basis, the United States remains the world’s largest lubricant consumer by volume, although its dominance has declined to around 23% despite historically accounting for a quarter of global lubricants demand. The increasing penetration of synthetics in the North American automotive sector, while negatively affecting volumes, has compensated by boosting value. Similarly, the European market remains sluggish for reasons including high fuel prices deterring car ownership and use, continuing economic uncertainty and efficiency gains through downsizing and longer service-intervals. The one beacon of hope in Europe for volume growth might be Russia if its government’s modernization programs are successfully implemented.

The demand for lubricants in the BRIC countries, in particular China and India, continues to grow quantitatively and qualitatively, driven by both industrial activity and growth in the commercial and passenger vehicle population. Kline reports that this latter phenomenon has spurred a manifold augmentation in quality through the implementation of global OEM specifications, improvements in packaging to deter adulteration, and greater brand awareness. This is well reflected in China where API Group III baseoil consumption has doubled every two years. Despite this, the caveat remains that price-points are often low and, given supply-links between state-owned enterprises and other factors, a significant part of this market remains inaccessible.

Kline’s findings caution that Asian growth may be temporarily tempered by declining exports to Western markets, domestic inflation concerns, and a consequent slowdown in automotive sales. The report notes that in India interest rates have increased 10 times within the last two years thereby restraining car-ownership growth, and Japan’s recovery from a devastating earthquake and tsunami has seen resultant domestic reconstruction crimped by power-shortages and disruptions to manufacturing supply chains.

Although market conditions remain volatile and the global economy in protracted flux, Agashe observes that the demand for lubricants remains fundamental and that lubricants are essential to keep the world moving.

Kline and Company’s Global Lubricants 2010: Market Analysis and Assessment provides a detailed analysis of the global automotive and industrial lubricant industry segments and the players who participate in them.

Geeta will share key highlights from the newly published edition of this valuable annual service that examines capital industry matters..

such as:

Who Should Attend:

Senior executives, strategic planners, competitive intelligence trackers, marketers, sales, and other professionals in the finished lubricants business who are interested to assess the markets for their products and understand their competition on a global basis. Also, basestock and additive suppliers who provide raw materials to this industry.

REGISTER

Changes in lubricant additive consumption have been and will continue to be driven by finished lubricant consumption, but also by regulatory pressure to reduce tail-pipe emissions. Reduction of tail-pipe emissions has been targeted by improving finished lubricants quality levels and through a series of recently developed and implemented technologies. Adaptation to these new quality requirements and technologies has impacted differently upon the consumption of various additive function classes, bringing some up, and sending others at the bottom of the charts.

In the Heavy Duty Motor Oil (HDMO) application, which accounts for almost a quarter of the global lubricant additive demand, for instance, the use of the Exhaust Gas Recirculation (EGR) system -aimed at reducing nitrous oxid (NOx) emissions- has generated a higher level of consumption for dispersants to deal with the additional soot outputted by the system, and an increase in TBN treatment to handle the excess acids the system creates. Similarly, Diesel Particular Filters have been introduced to reduce particulate matter emissions. The channels of these filters get easily clogged with ash. In order to maximize the interval between the cleaning of these filters, the ash content in HDMO must be minimized. As detergents are the main contributors for ash, for compatibility with the Diesel Particular Filters, the detergent treat has come down. Another example is the use of biodiesels who have poor oxidative resistance and tend to create sludge, hence the increase in antioxidants and dispersants levels used in formulations.

In the Passenger Car Motor Oil (PCMO) application that accounts for another 20% of the global lubricant additives consumption we discover a comparable picture. Fuel improvement economy in PCMO is targeted mainly through a transition to lighter viscosity grades. This measure attracts an increase in VII and friction modifiers levels in lubricant formulations. Higher quality levels for the finished lubricants translate into increased oil durability and hence extended drain intervals. An extended drain-interval attracts in its turn the need for an increase in the use of antioxidants and dispersants to retard oxidation, and clean the accumulated sludge in order to further maximize the window between refills. Of course, compatibility with emission control devices such as Diesal Particular Filters applies to PCMOs as well, driving like in the case of HDMO a decrease in detergent treat.

Looking forward to 2015, Kline sees a composite future for the different function classes within lubricant additives. While the overall global lubricant additive demand will grow with 3.2% per year, demand for antioxidants will go up with around 5% per year, friction modifiers with about 4%, dispersants and VIIs with around 3.4%. Other classes that are expected to experience a growth above the average are PPDs, corrosion inhibitors, and emulsifiers. By contrast, detergents, but also EPs and antiwear will grow at a rate below 3%.

To learn more about the forecast evolution of the various additive product classes in the HDMO, PCMO, ATF, Gear Oil, Tractor Hydraulic Fluid, Metalworking Fluids and General Industrial Oils application, listen to this insightful web-presentation delivered by Kline’s Petroleum Industry Manager, Milind Phadke. Contact us for password.

Global Lubricant Additives 2010: Market Analysis and Opportunities is a comprehensive analysis of the global market for lubricant additives focused on estimating additive consumption by functional class and additive chemistry, product quality and formulation trends, market developments, challenges, and business opportunities in every important lubricant-consuming country in the world.

The global market for metalworking fluids did not escape the effects of the economic recession.

Despite the contraction in 2008-2009, Asia emerged as the least negatively impacted. In fact, since 2007, Asia posted a positive annual growth rate (CAGR) of 3.3% in demand for metalworking fluids. Within Asia, China, Japan, India, and Korea are the four largest markets accounting for 90% of regional demand. Europe and North America did not fare as well.

Demand for metalworking fluids in Europe dropped by 1.8% CAGR since 2007. “This is not as bad as one would expect – Milind Phadke said-   if you consider how significantly the recession has impacted countries like Greece, Ireland and Portugal”. Unlike these three countries, Germany and Russia, the two largest manufacturing economies in Europe, have shown strong recovery keeping overall European level of metalworking consumption pretty high.

North America took the brunt of the recession. Metalworking fluids consumption in North America in 2010 was considerably subdued compared to 2007 – average annual growth rate during this period was (7.8). But, for Kline industry expect, George Morvey, “there is light at the end of the tunnel”. Transportation equipment production accounts for about 31% percent of the overall demand for metalworking fluids, holding the largest share by end-use application. “In 2010 North America (automotive) production was back up  to 12,2 million units from 8,8”, Morvey said, stressing that automotive production is  expected to grow further in 2011, which will impact positively demand for metalworking fluids. Morvey pointed out that Volkswagen has just recently opened a new car assembly plant in North America.

Growth will be moderate as there is an undeniable overall shift away from Europe and North America to Asia. For instance, automotive production has gone up in Asia from 23.4 million units in 2004 to 29.6 in 2007 and 32.2 million units in 2010, while production in Europe and North America has decreased since 2004 by 1.8, and 2.4 million units, respectively.

Looking forward to 2015, Kline forecasts Asia to post a 5% CAGR, North America 2%, and Europe 1%. For Asia growth will be driven not only by an increase in the domestic demand, but also as a result of continuing relocation of manufacturing facilities from high cost economies to low cost economies. The manufacturing shift to Asia is likely to be to some extent dampened as – post-recession – many of the governments in North America and Europe are focused on making their economies less overly- dependent on services and retaining whatever manufacturing strengths they have. The extent to which we’ll witness this in practice is “a highly politically charged question, and we’ll need to see how dynamics play out”, said Milind Phadke in the conclusion of the webinar.

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The result of this market dynamic has been a dramatic shrinkage in the Group I market. Between 2006 and 2009 the share of Group I basestocks in overall supply has declined from 66% of total to about 55% of total on a global basis. The decline in North America and Europe where most of the Group I plant closures occurred has been even more pronounced.

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