Russian Base Oils, Lubes to Stagnate


MOSCOW – Russian production of base oils and lubricants is poised to stagnate to around 2.1 million tons in the next few years as the economies of Russia and Europe experience hard times, an industry event heard here recently.

Another major factor for this stagnation is the sluggish demand prompted by the development of more sophisticated equipment and vehicles that use less engine oil, according to Tamara Kandelaki, head of the Moscow-based consultancy InfoTek. This is good for us as customers and end-users, but bad for the industry and oil suppliers, she told Global Business Clubs Base Oils, Lubricants and Fuels conference held in Moscow in May.

In 2014 Russias combined base oil and lubricants production amounted to 2.1 million tons, down from the 2.3 million tons produced the year before, according to InfoTek. The final balance sheet for the countrys combined base oils and lubricants market in 2014 is 1.6 million tons consumed, 500,000 tons imported and 1 million tons exported.

Importers of base oils and finished lubricants into Russia are expected to become more aggressive because demand will be sluggish and decline in the following several years, according to the consultancy. The importers will strive to increase their sales in Russia. It could result in price competition with key factors here being personnel motivation and qualification, knowledge of market trends, mobility and flexibility of the price formation.

InfoTek found that around 60 percent of the countrys exported base oils and lubricants are shipped to Europe and Ukraine and that exported volumes dropped by 20 percent in 2014, compared to the year before.

International sanctions imposed on Russia over its military actions in Ukraine have not yet hampered the Russian base oils and lubricant industry, InfoTek confirmed. We dont see any problems with feedstock or raw materials used in base oil production. Business interests always prevail [over political disputes], Kandelaki said.

Conditions are the same for finished lubricant manufacturing. [Russian] oils are produced with imported additives such as those of Infineum, Lubrizol and Afton. Besides, Russia has its own sufficiently improved additive production in Belarus, she said, adding that [because of the sluggish economy] lube producers expect their profits to be slashed, prompting them to demand price cuts by their additive suppliers.

Companies on the sanctions list feel a lack of long money from their own funds or through Russian banks that are also under the embargo, according to InfoTek. It can result in delays in realization of their investment plans. The general domestic consumption is impacted by the sanctions but it depends on what industry we are talking about, Kandelaki said.

In Russia, it is more profitable to export crude oil than to produce and export petrochemical products, including lubricants, and as a result oil majors such as Lukoil or Rosneft are not in a hurry to modernize base oil production, Kandelaki said. In recent years, the Russian oil industry has been a main source for filling state coffers, she proclaimed, adding that all large state funds such as those for national welfare or for defense depend on the countrys oil industry. Thats why in the last few years the government is increasing oil export duties.

The countrys oil industry is lobbying the government to revise its so-called oil tax maneuver in a new draft bill that can limit the export tax rates for certain petrochemical products. The tax rate for lubricants is set to gradually decrease from 66 percent [of the current crude oil export duty] in 2014, to 48 percent in 2015, to 40 percent in 2016 and to 30 percent in 2017, Kandelaki said.

Lobbyists are exerting a great deal of effort to ensure that the export tax code does not group low-margin products such as base oils, lubricants, coke, benzene, toluene and xylene with higher margin products like fuel oil, bitumen and paraffin. Base oils and lubricants are products made by complex processing of fuel oil, and thats why they [should not] be listed together with it, Kandelaki said. However, the exports taxes for them still remain sufficiently high.

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