The lubricants market in China is estimated at about 5 million metric tons, valued at U.S. $5.7 billion in 2006, Wang said. On a volume basis, that 5 million tons was 16 percent consumer automotive lubes, 38 percent commercial automotive lubes, and 46 percent industrial lubes. On a value basis, consumer oils share of the $5.7 billion total rose to 18 percent, commercial automotive oils accounted for 38 percent, while industrial lubes dipped to 44 percent.

Of the 2.7 million tons of automotive oils, heavy duty motor oils account for 63 percent, passenger car engine oils for 18 percent, motorcycle oils for 6 percent, and other automotive lubes for 13 percent, Wang said. General industrial oils are the largest segment on the industrial side, with 39 percent of the 2.3 million ton total. Process oils account for 37 percent, industrial engine oils for 11 percent, metalworking fluids for 10 percent, and other industrial oils for the remaining 3 percent.

Quality levels for passenger car oils are generally higher than for heavy duty motor oils, Wang noted. About 60 percent of the passenger car oils in the market are API category SG and above, while on the heavy duty side only 30 percent of the oils are API CF-4 level and above. Low end products, frequently with no additives, account for a significant portion of the industrial segment.

In Chinas automotive sector, lubricants are primarily sold through distributors. More than 85 percent of commercial automotive lubes and about 65 percent of consumer automotive lubes move through distributor sales, compared to just over 40 percent of industrial lubes.

On a volume basis, said Wang, Chinas local majors, Sinopec Corp. and PetroChina Co., dominate with 57 percent of the market. Multinational oil companies such as ExxonMobil, Shell, BPCastrol, Caltex, Total, Fuchs, Valvoline and others together have 23 percent of the lubricant market. Local blenders have the remaining 20 percent.

Multinationals control the largest share of the consumer automotive segment, while Sinopec and PetroChina dominate the industrial segment. Local blenders have a significant 45 percent share of the commercial automotive market.

Although most students of Chinas markets segment the country geographically, Wang said, Kline prefers the concept of accessible markets, segmenting the country by level of economic development. Under this scheme, the most developed segment is the three special districts/provinces of Beijing, Shanghai and Guangdong, with highest per-capita income. This segment consumes more high-end lubricant products, including passenger car lubes, and is the most advantaged area for multinational oil companies. The coastal and mid-country segments have more diversified markets, and mid-tier lubricant products dominate. Finally, the interior, where the economy generally lags, mainly consumes low-end products and is loyal to local brands.

Chinas lubricants market is very fragmented, Wang continued. State-of-the-art and outdated vehicles and equipment coexist. Over 2,000 local blenders compete. And different categories of customers can behave very differently; quality may be very important to some, while relationships carry more weight with others.

The cost of labor is relatively low in China, said Wang, with 200 million unskilled workers readily available. As a result, the do-it-yourself oil change market will continue to be minor in the future. Likewise, the use of manual labor rather than machines will result in low lubricant consumption in such industries as non-metals mining, toy production, slaughter houses and agriculture.

Chinas lubricants industry has faced tight raw material supply, said Wang, caused by natural disasters, manufacturing accidents, refinery downtime, high crude prices and base stock production competing with fuel production. Base oil prices doubled in 2006. As a result of base oil shortages, the local majors Sinopec and PetroChina have reduced base oil sales to protect their own lubricant divisions, and central control of all base oil sources was announced two years ago.

Multinationals have been least vulnerable to tight raw material supply in China. They generally have captive base oil supply or can import from other regions, said Wang, and the impact on their margins is smaller as their products are primarily high end. The local majors are more vulnerable, as their captive base oil supply is in China, and their margins are slimmer on mid-tier products. Local blenders cannot afford imported base oils, struggle for product when PetroChina and Sinopec limit sales, and struggle to survive in the low-end markets.

More stringent quality and environmental standards are being implemented, Wang said. And a lubricant consumption tax equivalent to 2.5 U.S. cents per liter was put into effect in April 2006, part of the governments push to control all resources.

Chinas lubricant suppliers, Wang concluded, have evolved to compete on a value-chain basis, not just on production, giving advantages to integrated oil companies. By focusing on raw material supply, technical capability, mergers and acquisitions, distribution networks and OEM market penetration, the local majors are taking a growing share of the growing high-end and mid-tier lubricant markets. Multinationals are making inroads through mergers and acquisitions, while local blenders again are getting squeezed as the low-end market shrinks.