The fundamental driver for finished lubricants demand growth in the region, essentially is the growing population, growing disposable income, and the rapidly expanding car, truck and bus population in this region which drives the automotive lubricants market, he explained. And as vehicle fleets are modernized, older cars are scrapped and replaced by newer ones, he added.

Kline expects overall base stock demand in the region to grow at close to 2.5 percent annually, reaching about 80,000 b/d by 2019. The share of API Group I is projected to decline from 87 percent in 2009 to 82 percent by 2019. Though thats not a very large decline, at the same time it does indicate Group II and III consumption is going to grow faster than the market average, Phadke pointed out.

Group I imports from Europe to Africa and the Middle East are expected to increase. The reason is that Group I surplus in Europe is increasing, he said. At the same time, the export competitiveness of Group I from Europe is increasing.

Finished Lubricants
Kline estimated finished lubricant demand in Africa and the Middle East reached 3.5 million metric tons in 2009.

Iran (20 percent), United Arab Emirates (16 percent), Egypt (11 percent), Saudi Arabia (9 percent) and South Africa (8 percent) are the top five markets in the region, Phadke said, accounting for about 64 percent of the regions finished lubricant demand.

In terms of products, automotive lubricants dominate. If you look at the finished lubricants consumption, this is predominantly an automotive market, with automotive markets accounting for close to 75 percent of the total demand, Phadke noted. That includes 42 percent heavy duty motor oils, 25 percent passenger car motor oils and 8 percent other automotive lubricants.

In Africa and the Middle East, general industrial oils accounted for about 13 percent of product demand, Kline found, and industrial engine oils about 3 percent. The nine percent remaining are considered unclassified oils. Some general industrial oils and industrial engine oils are consumed in the Middle East in the petroleum sector as well as the marine sector, he added.

Phadke pointed out that the region as a whole is not industrialized to a large extent. Exceptions include South Africa, some countries in Northern Africa, and some countries in the Middle East.

The predominance of automotive lubricants in the AME market is in sharp contrast to what we see in other markets around the world, and also in contrast to the global industry, he continued. If you look at a global level, industrial lubricants account for about 45 to 50 percent of the total demand whereas here they account for just about 25 percent.

Base Stocks
The 3.5 million ton lubricant blending volume has created a base stock market of about 63,000 barrels per day in Africa and the Middle East, according to Klines report. Of that, nearly 87 percent consists of API Group I base stocks.

Whats interesting is theres a small but growing demand for Group II and Group III base stocks in this region, Phadke pointed out. The Middle East has a slightly higher share of Group II and Group III, compared to Africa. The reason is the car market in the Middle East is more modern compared to Africa, and also because there is a significant amount of export production in the U.A.E., he said.

There is little consumption of Group IV polyalphaolefins base stocks in the Africa and Middle East region. To begin with, the size of the PAO-based lubricant market is very small in this part of the world, he explained. Whatever demand there is, is generally catered by imports of finished lubricants. As such, we see very little use of Group IV PAO in this region.

In 2009, Kline said Africa and the Middle East produced about 48,000 b/d of lubricant base stocks, all of it Group I quality. The main base stocks-producing countries include Iran, Saudi Arabia, Egypt and South Africa, Phadke said. Together these four countries accounted for an estimated 80 to 85 percent of the supply in the region.

With lubricant base stock demand of 63,000 b/d and supply of 48,000 b/d, the region as a whole has deficit of around 13,000 to 15,000 b/d, he noted. This deficit is slightly higher in Africa, as compared to the Middle East because it has got lower base stock production, Phadke continued. About 50 percent of this deficit is in the form of Group I base stock, and the balance is Group II and Group III base stocks.

To satisfy the base stock deficit, he said, the region as a whole imports about 14,000 b/d, divided almost equally between Group I at 50 percent, and other base stocks.

U.A.E. is the largest importer of both Group I and Group II base stocks, Phadke noted. This is to be expected, given the large blending requirement that is there. There is no base stock production happening in U.A.E. Many global lubricant companies as well as regional producers have their blending capacity in the U.A.E, through which they supplied the region.

Beyond the U.A.E., most Group I imports are by North Africa nations and Mediterranean countries. Most of the base stocks that these countries import are sourced from Europe – typically Italy, Spain, France and even as far as Russia.

He pointed out a symbiotic relation between North Africa and Europe. North Africa exports large quantities of used oil to Europe to feed to their rerefining plants. And it in turn imports surplus Group I production from Europe.

In addition to the U.A.E., countries such as South Africa, Iran, Saudi Arabia, Kuwait and Oman import substantial amounts of Group II and III base stocks. Group II and Group III base stocks are primarily imported from South Korea, Malaysia and the U.S., he said.

The Africa and Middle East region is often overlooked because of a focus on bigger, higher quality or faster growing markets, Phadke pointed out. But in the current post- recession scenario, with the demand outlook for Europe and North America being so bleak, the AME region is actually looking quite good. The AME region along with the Asia, did not stop growing, even at the height of the recession. The [gross domestic product] growth rate essentially slowed down by 2009, but there wasnt any contraction that happened in this region.

Going forward, the Africa and Middle East region is expected to show fairly strong economic growth. It wont grow as strong as Asia, but its growth will definitely be better than the other parts of the world, he added.

The companys projections suggest Group II and III will play a bigger role in the region by 2014 and 2019, based on public announcements of plans for base stock plants in the region. They include Shells GTL plant in Qatar, Nestes joint venture plants in Bahrain and Abu Dhabi, and plants planned in Iran and Saudi Arabia.

Because of this new capacity addition that is being planned, the supply demand balance in the region will change dramatically, Phadke said. It will go from a deficit position of 14,000 b/d in 2009 to a surplus of around 20,000 to 25,000 b/d by 2019, he added. This hides the fact that most of the high quality base stocks production in the region, with some exceptions like group II in Iran, is made for export. At least that is the conventional wisdom. It remains to be seen how producers of high quality base stocks place their volume, given the fact Group III is going to be in surplus at a global level.

Klines report is titled Lubricant Basestocks in Africa and the Middle East 2010: Market Analysis and Opportunities.