Chinas Lube Demand Slides, Retains Value


Lube consumption in China dipped 1.3 percent to an estimated 7.4 million metric tons in 2019, while the value of the market remained the same at nearly U.S. $29 billion, according to a recent report by consultancy Kline & Co.

By volume, industrial lubes accounted for the biggest share, followed by the commercial and consumer segments. But value-wise, the consumer segment had the largest share, followed by commercial and industrial.

David Tsui, a project manager in Klines energy practice, advised that lube suppliers should look hard at partnerships. As an example he cited Chinas largest ride-sharing service provider, Didi, whose regional operators partner with lube suppliers to provide engine oils for drivers. These partners include South Korean S-Oil in Foshan, Guangdong province, and domestic company Donghao in Sichuan province. Last year, Didis autocare arm Xiaoju signed Chevron to offer Caltex-branded oils in Xiaoju service stores nationwide.

In December, ExxonMobil and Tencent entered a joint venture with auto care chain store Tuhu. ExxonMobils goal is to expand the network of ExxonMobils auto care store brand Mobil1 in China.

Partnerships are an important way going forward in China. Some companies are becoming larger and have great influence in the market, so if you choose the right partner you will see a lot more benefits, Tsui said.

He said the consumer segment, which represented only 20 percent of the markets volume in 2019, generated around $12 billion in sales, while the industrial segment accounted for over 40 percent of volume but generated only $8 billion in sales. The reason, he continued, was that a big chunk of industrial oils – such as processing oil and cutting fluids – are provided by local suppliers who often compete on prices. Special fluids, including wind turbine gear oils and specialty greases, generate a lot of value. However, volumes of these oils are low.

In 2018, 4.2 million tons of lubes were sold in the consumer and commercial lube segments, and 70 percent of them were engine oils. Meanwhile, processing oils took the largest share in the industrial segment, which was 3.3 million tons, according to Kline.

Tsui said Chinas lube consumption is largely affected by four factors – environmental regulations, the domestic economy, industrial sector and automotive sector. He cited, for example, regulations that control air emissions and other pollution. China plans to implement part of the China 6 standard, which is said to be slightly stricter than Euro 6, on July 1 this year, replacing China 5 standard, which was implemented in 2017.

Tsui noted that China, when implementing a new emissions standard, usually attempts to eliminate vehicles that meet older emission standards. For example, after the adoption of China 5, vehicles meeting previous emission standards were no longer allowed in major Chinese cities.

However, that very intention prompted the China Association of Automobile Manufacturers to file a plea to postpone the implementation of China 6, citing the outbreak of the coronavirus, which severely disrupted Chinas economy. Sales of passenger cars, for example, plummeted 92 percent year-on-year for the period between Feb. 1 and Feb. 16, according to the Shanghai-based China Passenger Car Association.

According to CAAM, the plea – which is awaiting the governments response – is intended to give auto manufacturers extra time to clear out inventory and to manufacture new vehicles that meet China 6.

Tsui said the epidemics impact on Chinas economy should be short lived. British multinational investment bank and financial services holding company HSBC has cut Chinas GDP growth forecast in 2020 to 5.3 percent from 5.8 percent.

Among lube suppliers, domestic blenders supply approximately 75 percent of the market by volume, while the rest is supplied by foreign companies, which usually have a strong hold in the industrial sector because they offer products that meet all the new specifications. Tsui said foreign companies will continue to expand in the lucrative sector, but local companies are catching up.

Foreign companies have decades of technologies and expertise, so they are not easily replaced. However, local major rivals are trying to nibble at the market through poaching talent from their foreign rivals and [through] heavy spending on R&D, Tsui said.

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