In 2012, BRIC countries consumed an estimated 12.8 million tons of finished lubricants. Their global lubricant consumption increased from an estimated 25 percent in 2006 to approximately 33 percent by 2012. Clearly, the economic performance of the BRIC countries is of prime importance to the lubricants industry.

Economic Outlook

The BRIC countries have very little in common. The only reason they were clubbed together was because they were the only $1+ trillion economies (on the basis of purchasing power parity) outside the Organization for Economic Cooperation and Development countries and because they made a cool acronym.

As the worlds most populous countries, China and India have populations exceeding one billion people. By contrast, the populations of Brazil and Russia are less than 200 million each. Russia and Brazil are far richer than China and India with GDPs per capita exceeding $10,000, compared to $6,291 for China and $1,508 for India.

Russia has nearly zero population growth, while population growth is 0.6 percent in China, 1.2 percent in India and 1.1 percent in Brazil. Additionally, their geographies differ greatly. Consequently, growth drivers and restraints for these four countries are often disparate and diverse.

According to The Economist Intelligence Unit (www.eiu.com), growth in China will slow sharply in the coming years, growth in India and Russia will increase marginally, and Brazil will be unchanged.

The long-term growth outlook for India and Brazil is relatively stable. India, because of its low dependence on exports, was affected only slightly by the recession in the U.S. and European Union. However, more recently, India has suffered from an outflow of foreign capital due to improving conditions in the U.S. and Europe, as well as the prospect of a tighter money supply in the U.S.

Both Brazil and India saw their currencies depreciate significantly in 2013. Between 1 January and 15 November, the Indian Rupee lost 16 percent and the Brazilian Real lost 13 percent of their value against the U.S. dollar.

Russian growth has been primarily driven by energy exports, with a strong dependence on Europe. Consequently, its growth is affected by growth in Europe. If a shale gas industry takes root in Europe, Russian energy exports will be adversely affected.

While consumption has grown during the good times, investments in Russias manufacturing sector have been few. Indeed, a perceived political risk has caused much capital to move out of the country. Given its near obsolete manufacturing sector, Russia is unable to grow via manufacturing exports. All this, combined with a flat or declining population, makes for a dim economic outlook.

The long-term cause of Chinas slowdown is its demographic profile. Chinas population is ageing fast, and the share of its working age population is dropping. In the short term, the primary cause of Chinas slowdown concerns the slowing of exports. Europe and North America simply do not have the same appetite for Chinese goods that they had before the recession.

China is also losing its cost advantage due to rising labor costs and an appreciating currency. The massive stimulus package announced at the height of the recession helped prevent too steep a drop in growth rate, and the Chinese government is continuing to reorient the economy away from exports to growth led by investment and consumption.

In reality, the reorientation of Chinas economy started in 2006. Share of exports as a proportion of GDP dropped from close to 40 percent in 2006 to nearly 25 percent in 2009 and then recovered to around 30 percent by 2011. The reorientation has been quite bumpy. A growing housing bubble prompted the government to clamp down by slowing both credit flow and construction project approvals. This caused a slowdown not only in China but also in economies dependent on the country.

Impact on the Lubricants Industry

Against this background, the key question is whether the BRIC countries will continue to prop up growth in global lubricant demand. Klines analysis foresees continued growth but at a much slower pace. Between 2006 and 2012, the share of BRIC countries in global lubricant demand grew by an estimated eight percentage points. Over the next five years, this is expected to slow to between two and three percentage points.

However, the growth potential in China and India remains strong despite the current situation. Automotive production in China and India has grown strongly over the last 12 years. Despite this, automotive penetration in China and India remains low even by Russian and Brazilian standards, let alone that of more advanced economies.

Despite rising disposable income, it is unlikely that emerging economies will ever achieve the level of auto ownership in advanced economies, given the constraints of crowded cities and poor road infrastructure. However in the short term, automotive populations will show strong growth that, in turn, will drive lubricant consumption.

On the industrial side, infrastructure development – comprising power generation and transmission, roads, ports, airports and the like – will drive lubricant consumption directly and indirectly through related industries like mining, cement production and construction equipment.

While the underlying drivers for lubricant growth remain unchanged, what has changed is the greater focus on higher quality lubricants. The primary impetus for this change includes environmental factors, cost advantages and base stock supplies.

Environmental Factors: China and Indias economic development has been accompanied by severe environmental deterioration. The growth in carbon dioxide emission is indicative of the problem. The smog experienced by Beijing in January 2013 was a wakeup call for the government regarding the need to tackle environmental issues.

The Chinese government is reported to have allocated U.S. $275 billion for environmental remediation. This could spur the creation of various low-cost technologies that could be applied in other emerging markets. In addition to environmental remediation, the government also plans to produce 20 percent of its energy requirements from renewable sources.

Besides air pollution, water scarcity and water pollution are equally important issues being tackled in China. Of the three water consuming segments – household, agriculture and industry – industry has to bear the brunt of water shortages because households and agriculture are politically sensitive segments.

As a result, applications for new industrial projects must now meet increasingly stringent water consumption, clean-up and disposal norms. This has spurred greater focus on water conservation and recycling, and it is creating greater interest in neat oils as opposed to water-miscible metalworking fluids.

Manufacturing: Faced with increasing costs due to growing labor costs and currency appreciation, Chinese companies can no longer focus on low value-added manufacturing. Many western companies have concluded that outsourcing of manufacturing to China no longer makes for a compelling business argument when logistics costs are factored in with higher labor costs, higher exchange rates and greater risk of intellectual property theft.

This has put greater pressure on Chinese manufacturers to move up the manufacturing value chain. This trend is already evident in the construction equipment industry where many of the leading global manufacturers are Chinese – for example, Sany, Zoomlion and Xugong.

Industries where the Chinese may challenge and overtake counterparts from Organization for Economic Cooperation and Development countries include sectors encompassing auto manufacturing, auto components, ship building and a variety of fabricated products such as tubes and fittings, ball bearings, heat exchangers and electrical equipment. As these manufacturers increasingly compete on a global scale, they will have to make their manufacturing processes greener, more energy efficient and less polluting.

Base Stock Supply: The share of high-performance base stocks in the overall supply chain is increasing. By 2020, the share of API Group II and III will exceed 50 percent. The use of these base stocks will be driven predominantly by their availability, with technical requirements being secondary.

More interestingly, Asias role as the supplier of Group III to the world will change. Asias share in global Group III supply will drop from about 80 percent at present to about 30 percent by 2022. This is due to the growing Group III supply in other parts of the world. As a result of this change, most of the Group III manufactured in the region will stay there, spurring a move to higher quality lubricants.

The Final Analysis

The BRIC countries have little in common except that they are substantial and have enjoyed high growth. However, the economic growth drivers differ significantly among them. All four BRIC countries face economic challenges with China re-orienting its economy to consumption-led growth, which will lower its overall growth rate, while both Brazil and India are battling high inflation and currency depreciation. For Russia, stagnation is a real possibility.

Each BRIC country has a large lubricant market with strong growth potential. While growth in China may wane, Brazil and India appear likely to continue to grow at current rates. Conversely, growth in Russia is likely to taper off.

While the lubricant market in BRIC countries is vast, the quality portion of the market is still limited. However, due to environmental and cost pressures, quality may improve rapidly in the near future.

Milind Phadke is director of Kline & Companys Energy Practice, a worldwide consulting and research firm. He can be reached at Milind_Phadke@klinegroup.com