PRAGUE – The European lubricants market will shrink in the near future for multiple reasons, but an industry analyst says its future viability is in meeting an increasing demand for premium lubes, not in volume growth.
Historically, global lubricants demand was highest in 2007 when it reached 40 million tons. By the third quarter of 2008 it went into a deep recession plunging to 35 million tons in 2009, before recovering to 38 million tons by 2011. It is not where it was in 2007, but fortunately for us it is on a recovery path, Geeta Agashe, of Kline & Company consultancy, told ACIs European Base Oils and Lubricants conference held here last week.
In 2004 Europe accounted for 29 percent of all lubricants consumed globally, but today consumes only 18 percent, according to Kline.
There are many reasons why it happened, Agashe, Klines vice president for energy, told the conferences opening panel.
The current Euro zone debt crisis, declining population, the slowdown in Asia and industries moving East are all significant factors shaping the European lubricants market, Agashe said. “The big picture is that North America and Europe stagnated and consume less lubricants now, whereas the Asia-Pacific region has become a world epicenter for lubes consumption, accounting for 42 percent of the total global demand.”
By product stand point, passenger car and heavy duty motor oils combined for 43 percent of the total global lubricants demand in 2011. Process oils accounted for 14 percent, hydraulic fluids for 9 percent, general industrial oils for 8 percent, industrial engine oils for 7 percent, metalworking fluids for 6 percent and other oils for 9 percent. Grease demand last year accounted for 3 percent of the total global lubes demand.
Kline reported that Russia, Germany and the United Kingdom placed among the top 10 lubricants consumers in 2011 globally, accounting for 4, 3, and 2 percent, respectively. At the top of the list, the United States once accounted for 25 percent of the total lubes demand, but has fallen to below 22 percent.
How long these countries will retain their positions is unknown, Agashe said, pointing out the UK at 10 will continue to shrink, and will be replaced by Indonesia. We are expecting more Asian countries to make it to the top 10, and some of the mature markets to drop out.
Kline says that Turkey, based on projected GDP growth, is the only country after Russia in Europe with an outstanding potential for future volumetric growth. Kline also sees significant potential in the so-called BRIC+K countries (Brazil, Russia, India, China and South Korea). Other countries that could join the top 10 are Ukraine, Kazakhstan or Vietnam.
The consultancy found that a key indicator of growth is gross domestic product (GDP) growth. GDP is very good indicator, except that it follows wider swings because demand is measured at marketer sales level, not at the final consumer level, making it a poor indicator for year-to-year performance, but a good long-term indicator, Agashe contended. She explained the wide swings are caused because markets expecting a surplus of material produce less to reduce inventory; when a market expects growing demand it tends to build inventory.
Whats going to happen to Greeces economy, whats going to happen to Italy or Spain is a big question mark. And when theres uncertainty in the market place, people tend to seat idle and watch, and there are no significant movements. That situation doesnt help recovery, Agashe observed.
This is all from a volume stand point, she continued. But from performance, Western Europe is a very sophisticated market. It uses extremely higher volumes of pure synthetic and synthetic lube blends that allow extended drain intervals, and that impacts the overall consumption in the old continent.
Europeans consumed 6.6 million tons of lubricants in 2011, with Russia accounting for 25 percent of the market. Next major consuming markets are Germany (16 percent), UK (10 percent), France (10 percent), Italy (7 percent), Spain and Portugal (7 percent), the Benelux countries (4 percent). The remaining countries consumed 21 percent. Together these markets account for 80 percent of lubricants consumption in Europe and over 90 percent of automotive and industrial production, according to Kline.
The consultancy found that Germany, Russia, UK, France, Italy, and Spain dominated vehicle population and manufacturing activity in Europe. From a qualitative stand point Germany has biggest per capita real GDP, with highest vehicle population and biggest automobile manufacturing with 6.3 million units produced in 2011. In comparison, Russia produced only 2 million units.
Germany uses the most sophisticated lubricants with highest penetration of fully synthetic lubes and semi-synthetic blends, Agashe confirmed. She concluded that use of synthetic lubricants is going to be a declining factor for consumption, even without the other economic factors that Euro zone is dealing with at the moment.
Russia and Germany lead overall lubricants consumption by a wide margin, compared to other countries, due to their large vehicle population and strong manufacturing base. In 2011 Russia consumed almost 1.5 million tons of lubricants, while Germany consumed almost 1.1 million tons. The rest of the group is experiencing stagnation, which is not helping the European recovery, Agashe noted.
The Euro zone contracted for the seventh consecutive month in 2012, and the downturn was most severe in manufacturing, followed by services, according to Kline. The steepest decline came from Spain and Italy, but during these months Germany and France have seen some softness in demand, Agashe said.
Kline found that the short-term future of the European lubricants market depends of several factors. Stabilization and resolution of the Euro zone debt crises is first, which showed some positive steps in the last few weeks. Another is the strong growth in Asia, where recovery may start in the last quarter of 2012. The last factor is reduction in energy prices.
The consultancy projects that demand will contract next year before any recovery takes place. The only recovery comes from Russia, with an expected growth of 2.4 percent from 2011 to 2021. Germany is expected to grow much more modestly at 0.3 percent for the same period. The other selected countries are slated for decline this decade, Agashe said, but predicted growth will resume for thosecountries in the last quarter of 2013, and reach about 5.6 million tons by 2020.
Lubricant marketers in Europe will need to look toward Eastern Europe and East of the Suez for organic growth opportunities and to expect competition to intensify in the coming decade, which will promote merger and acquisition opportunities. Companies that show agility, speed and have global capacity and provide consistent products and flexibility will survive, Agashe concluded.