Editors note: This the second of a two-part article. The first appeared in last weeks issue.
With China overtaking the United States to become the worlds largest lubricant market, its no surprise that lubricant, base oil and additive companies from around the world have flocked here. In the past decade, this market has attracted more investments – from foreign and domestic companies – than any in the world.
Now that the economy is slowing, some analysts question whether such bullish activity still makes sense. But others say Chinas lube market still offers plenty of opportunity.
According to Shenzhen-based research firm Li Mu, Chinas lube production declined 3.6 percent year-on-year in 2014 to 5.7 million tons due to a weakening market under a slowing economy. This does not take finished lube imports into account.
Chinas economy continues to decline, with a predicted gross domestic product growth rate of 7 percent for 2015, down from 7.4 percent in 2014, according to China Academy of Social Sciences, a government think tank. Financial institutes also downgraded forecasts for Chinas GDP growth rate in the following years. Goldman Sachs, for example, predicts the growth rates of 6.4 percent, 6.1 percent and 5.8 percent in 2016, 2017 and 2018, respectively.
Zhang Chenhui, an independent consultant for the lubricant industry, said the cracks showing in Chinas economy should give pause to suppliers still entering the market or launching capital projects.
Manufacturing and logistics are plagued by Chinas economy, therefore demand for the lubes for industrial uses and heavy-duty vehicles are also affected, he said. I think this is not good timing for companies to enter the market.
However, Neil Wang, global partner of Frost & Sullivan China, said these companies are actually following sound plans to enter the market now. Even in a slow economy, he said, demand for lubes should remain stable for two main reasons.
Industries like automobiles and large-scale manufacturing are still growing even though at a slower pace, he said, adding the number of vehicles will continue to grow thanks to rising disposable income in China, as well as the massive construction of road infrastructures.
Indeed, Chinese families continue to see car as a necessary property. In 2014, Chinese had 75.9 million cars, up 18.4 percent from 2013, according to China Association of Automobile Manufacturers. It predicts Chinese consumers will buy 12.5 million more cars in 2015.
Government economic policies are another reason to remain optimistic about the lubricants industry, Wang said. For example, the draft of the 13thfive-year economic plan, which runs from 2016 to 2020, requires an the nations manufacturing industry to move aggressively from the current labor-intensive, quantity-oriented model to a more automated, robotic model with a focus on quality.
Also, there are the high-profile plans initiated by the Chinese President Xi Jingping to boost regional economic growth. Among these plans are One Belt, One Road, as well as the establishment of Asian Infrastructure Investment Bank, which aims to help infrastructure projects in the Asia-Pacific region.
We think these policies and plans will bring splendid opportunities for the Chinese lube industry in the following years, and it is definitely a wise decision for lube companies to expand capacities and diversify their product lines, Wang said.
His opinion is echoed by Shell, which plans to grow its lube business in China and win over more automotive OEM partners.
Our lube business continues to grow in China, and we remain confident and positive on growth opportunities in the Chinese market, said a Shell spokesman. He added that increasing sales in the premium category, especially in the wealthy tier 1 and 2 cities, is a core part of Shells China strategy.
For now, multinationals still enjoy the dominance in the premium end of the market, driven by the growth of Chinas middle-class, but both Frosts Wang and the consultant Zhang cautioned that foreign companies are facing increasing challenges, including competition from Chinese independents like Hainan Handi Sunshine Petrochemical and the Nanjing-based Lopal, not to mention the state-owned oil majors Sinopec and PetroChina.
Its necessary for multinationals to explore and expand sales channels as well as optimize marketing tools to keep their dominance in the high-end market, Wang said. Also, he added, more attention should be paid on base oils for the foreign lube companies with blending plants in China but without their own base oil facilities.
China lacks highly refined Group III and Group III+ oils, which hinders the production of high quality lubes. Therefore, foreign companies with blending factories inside China should pay close attention to the base oil market to adjust procurement and production plans at the appropriate time, he said.
In the meantime, as profits in the current overly crowded vehicle engine oil sector continue to drop, Zhang suggested that small and medium-sized enterprises look into niche sectors such metalworking fluids and white oils for food and cosmetics industry.
SMEs with limited production capacity can serve these niche clients just fine, as long as they can provide the demanded quality, Zhang said.
Dongguan-based Amer is following this strategy. The medium-sized company is known for metalworking fluids, especially synthetic, water-based water-cutting oils. The worlds largest independent lubricant supplier, Germanys Fuchs Petrolub SE, owes much of its success to a focus on niche products, and it brought that strategy to China two decades ago. Last year, it built a new facility in Yingkou, Liaoning province, to produce automotive lubricants along with specialized lubes for a variety of sectors including steel, agriculture and mining.
The increase in our half-year earnings in 2015 in the Asia-Pacific, Africa region was substantial, primarily driven by higher earnings at the companies in China and India, said Apu Gosalia, head of the companys market research division and chief sustainability officer. He added that China contributed the biggest chunk of profits in the region despite its declining GDP growth rate.
Fuchs intends to continue investing in China. Gosalia said current plans include a factory for high-performance greases used by OEMs.
Plenty of other companies are likewise continuing to invest in China. Time will tell if the market can supply enough fruit for all of them.