Editors note: This the first of a two-part article. The second will appear in next weeks issue.
It is widely recognized that the Chinese market has grown rapidly the past decade and a half and caught up to the United States, which has long been the worlds largest.
There is disagreement, though, about which market is now largest.
According to calculations by Kline & Co. consultants, China is still the second-largest lube market and is not expected to pass the U.S. until 2020. However, German lube producer Fuchs Petrolub SE contends China already has a significant lead, with estimated demand of nearly 7 million metric tons in 2014, not including marine oils. In the U.S., Fuchs says, demand is slightly more than 6 million tons.
What is the reason for such varying estimates? Zhang Chenhui, a Shenzhen, China-based independent consultant with clients including Lubrizol and Hainan Handi Sunshine Petrochemical, suggested one reason.
If we just look at the qualified lube market, [China] should be after the U.S. market. But in China we have a large market for gray oils, and with those included, China definitely is the worlds largest market, he said. Gray oils are lubricants that do not meet Chinas national standards for various products such as engine oils, compressor oils and rail lubes.
Typically, these products are made by small companies, usually for use in tractors, scooters and other machinery in the vast rural area. Zhang estimated that annual sales volume of gray oils was around 2 million tons at its peak. But in recent years, as consumers become more sophisticated, the sales volume has declined to about 1 million tons a year, he said.
Across industries, many Chinese companies have learned how to skirt national standards. In the wake of the recent Volkswagen scandal for faking diesel engine emission tests, Chinese news reports suggested such practices would almost be expected in the domestic auto industry.
While there remains disagreement about whether China or the U.S. has the biggest lubricant market, there is consensus about which will be larger in the future. Many analysts believe lube demand in the U.S. has plateaued and is likely to shrink in the future. In contrast, most observers expect China will continue growing. Shell, for example, said it will continue to focus on China because it offers long-term growth potential. The Dutch-Anglo energy giant said China is already its number one market for sales volumes of Helix brand passenger car motor oils, Rimula heavy-duty diesel engine oil and Tellus hydraulic fluids.
During the many years that the U.S. was the worlds biggest market, lubricant suppliers from across the world did business there because of the opportunity for sales. A similar phenomenon has occurred in China, and indeed new players continue to enter the market.
Last month, Chinese base oil refiner Handi Sunshine officially launched its finished lubricant business, vowing to produce high quality lubes to compete against multinationals. In August, Shandong province-based GTS Chemical also opened a facility to produce high quality lubes under the brand name Ogistar.
Analysts cite several factors in predicting that Chinas lubricant demand will continue to increase – chief among them the expectation that the countrys vehicle population still has large growth potential. According to the China Association of Automobile Manufacturers, the passenger car population jumped 18.4 percent to 75.9 million.
But many say there are also reasons that the pace of growth in the lube market will decrease. Besides the slowdown in economic growth, the country is shifting toward higher quality lubricants that last longer and therefore reduce drain intervals.
Quality and quantity are working against each other, said Apu Gosalia, head of global competitive intelligence and chief sustainability officer at Fuchs. China is an emerging market that is starting to transition to a mature market. I think growth in Chinese lube demand will continue, but at much lower growth rates than in prior years.
A highly fragmented market, China now has thousands of lube brands generated by regional small and medium companies across the nation, and the number is still growing. While some brands do offer quality, some are just bad quality sold for quick money. Analysts say they will be weeded out as consumers become more mature.
Eventually China will only have a bunch of big brands that are strong enough to survive the market evolution, just like what we see in the U.S. and Europe, Zhang said.