ASEAN Zone Could Boost Lube Demand

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A free-trade zone scheduled to be created in Southeast Asia next year will probably boost lubricant demand in the region, industry analysts say. It could also help large suppliers gain bigger footholds while creating barriers for newcomers.

Modeled on the European Union, the ASEAN Economic Community is supposed to become a 10-nation bloc with free movement of goods, services, investment, skilled labor, and freer flow of capital. The first major step is scheduled to take place by the end of 2015 when most remaining import duties are eliminated.

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The main impact of the AECwould be growth in the automotive sector as high duties on vehicles – 30 to 40 percent – are reduced, Japnit Singh, senior director of market intelligence consultancy Spire Research and Consulting, told Lube Report Asia. This would mean a greater demand for Japanese automobiles that are assembled in Thailand, Indonesia and Malaysia and in turn will play a significant role in increasing the demand for lubricant oil, which is forecasted by experts to be 3.5 billion liters by 2016.

Thin Zar Winmaw, a consultant in Myanmar for Singapore-based Solidiance, thinks the free-trade zone will be a particular opportunity for large lubricant suppliers based in the region.

Lubricant giants would quickly penetrate into other [emerging] markets in ASEAN, creating barriers to entry for new entrants, he said.

Singh explained that the AEC will eliminate tariffs on automobiles and lubricants, though not every country current charges tariffs on those items.

Among the major markets in ASEAN, Thailand, Indonesia and Vietnam are currently imposing import duties for lubricants, he said. Singapore, Malaysia and Philippines do not assess such duties. With the AEC taking effect, there may be some opening of demand in Thailand, Indonesia and Vietnam. However, a significant proportion of the retail channel may still be controlled by the already-established domestic petrochemical companies. This may slightly dampen the opportunities for any new entrants.

According to Spire, the 10 nations of ASEAN (Brunei, Indonesia, Malaysia, the Philippines, Thailand, Myanmar, Vietnam, Singapore, Laos and Cambodia) have a total population of 616 million, and a combined gross domestic product of U.S. $2.3 trillion, which grew 5.4 percent in 2012. Demand for automobiles is forecast to grow about 8 percent annually in coming years, which could make the region into the worlds fifth-largest auto market.

Six of the countries – Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand – already have zero or virtually zero import duties on all but a few sensitive products. All 10 countries have committed to eliminating duties on non-sensitive items by the end of 2015. Myanmar, Vietnam, Laos and Cambodia get extra time – until 2018 – to cut duties on sensitive items. The list of sensitive items varies from country to country, but in some cases includes lubricants and/or automotive parts. For example, Thailand currently assesses a 10 percent duty on lubricants, while Indonesia and Vietnam have duties of 5 percent.

Thin said the free-trade zone could lead to shake-ups on the supply side of lubricant markets.

Mergers and acquisitions are also another possible scenario as companies are more likely to move around the region due to labor, tax and market advantage, she said.

She noted that Indonesias lubricant giant, Pertamina, aims to gain a large market share in the whole ASEAN region due in part to its attempted takeover of a lubricant producer in Thailand.

She added, Companies might emphasize both marketing and supply chain due to expected increase in demand and low production cost. Supply chain would be more effective and shortened as companies can now place production facility and the exporting country in the same country.

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