Slowdown Dents Chinas Lube Demand


Chinas estimated 2007 finished lubricants market of 5.3 million metric tons valued at $10.6 billion was second only to the United States in volume, consultancy Kline and Co. concluded in a recent study, though the countrys economy this year isnt immune to the effects of the recession gripping the U.S. and much of the world.

Geeta Agashe, vice president of Little Falls, N.J.-based Kline and Co.s Energy Practice, discussed the companys study, Opportunities in Lubricants 2008: China Market Analysis, during a Dec. 9 Web presentation.

China is providing great potential for suppliers of lubricant base stocks, lubricant additives and finished lubricants, Agashe said. Even though this market holds a lot of potential, its a very difficult market – extremely complex, extremely fragmented, and highly, highly competitive. It is a market that is changing very rapidly. The types of products consumed in China are distinctly different if you compare and contrast them with those used in the U.S., the U.K., Germany or France.

According to Kline, China had an estimated population of 1.3 billion last year. Its gross domestic product in 2007 was an estimated U.S. $2.8 trillion. It is the fifth largest economy in the world, only superseded by the U.S., Japan, Germany and U.K., Agashe said. Kline estimates that Chinas GDP growth rate will remain around 9 percent in the coming years. Direct foreign investment is around $67.5 billion.

Agashe explained that due to the collapse of the U.S. financial markets and recessionary trends worldwide, China is experiencing and is expected to continue to experience a slowdown, especially in its industrial production and commercial trucking sectors. The first two quarters of 2008 for China were robust and tracking forecasts, but the third quarter was flat, she noted. The fourth quarter was expected to show a slight decline that Kline anticipates will lead to a decline in the consumption of lubricants, more so in the industrial and commercial automotive sectors.

She emphasized that Kline does not feel the overall lubes market in China will show a negative decline in 2009 although it may not grow at the same pace as it has in the past. China is a big economy within itself, Agashe said. After 2010, our analysts feel a dip is expected to even out, and our forecasts to 2012 remain unchanged.

Kline cited as lubricant market drivers for 2007 to 2012 factors such as car sales that are expected to increase by double-digit percentages per year and a commercial vehicle population forecast to grow above 5 percent per year annually. Kline also expects primary metal, auto manufacturing, machinery and mining industries to continue to show attractive growth.

Barriers for growth during 2007 to 2012 cited by Kline include gradually longer change intervals, seal-for-life applications for some lubricant products, introduction of state-of-the-art equipment that consumes less lubricants, recycling of industrial lubricants, and improvements in maintenance practices.

Large, semi-nationalized oil companies Sinopec and PetroChina are considered local majors in China, and they are predominant in the northern and southern parts of the country, Agashe said. Multinational companies (MNC) doing business in China include ExxonMobil, Shell, BP, Chevron (Caltex), Total, Fuchs, Petronas, Valvoline and others.

On an overall volume basis, local majors Sinopec and PetroChina dominate with about 50 percent of the market. MNCs had about a 28 percent share in 2007, with the remaining 22 percent taken by a variety of smaller local blenders.

It was significantly different 10 years ago, Agashe noted. Then, they [Sinopec and PetroChina] accounted for far more than 50 percent. You can see MNCs have become really aggressive. Theres also a lot of small blenders that service very small geographic niches and certain end-use segments.

The automotive segment in 2007 totaled 2.9 million metric tons with the following market shares:
-Heavy duty motor oil, 45 percent
-Passenger car motor oil, 25 percent
-Motorcycle oils, 11 percent
-Other (including automotive gear oil, grease, hydraulic and transmission fluids), 19 percent

In the passenger car motor category, she said, about 70 percent of the volume consumed in China is made up of multigrade. We dont see any usage of 0W as we see in North America, or in western Europe, Agashe noted. They use a little bit of 5W grade, but frankly, most of the multigrades that we see consumed in China are heavier viscosity multigrades, like 10Ws, 15Ws, 20Ws.

According to Kline, Chinas industrial segment in 2007 totaled 2.4 million tons and broke down as follows:
-General industrial lubricants, 38 percent
-Process oil, 36 percent
-Metalworking fluids, 12 percent
-Industrial engine oil, 11 percent, and grease, 3 percent.

With all new power generation projects coming up in China, we have seen significant growth in the turbine oil category, along with compressor oils, refrigeration oils and industrial gear oils all growing, Agashe said. Process oils consumption is also increasing in China, she said, primarily because the textile industry is big, and food processing is growing.

In the general industrial lubricants segment, about 60 percent of the volume is of mid- to high-end quality, Kline found, while 40 percent consists of very low-end products.

Essentially, what we saw in many instances was that people use just straight lubricant base stocks with limited, if any, additive content, Agashe recalled. They call these total loss system oils. They just use them to top things off, and they are sold at very, very low prices.

Agashe cautioned that those considering the China lubricants market because of its size should look closely at what segments they want to serve. All of the 5.3 million tons might not necessarily be the kind of market you want to play in, because some parts of this market are made up of very low-end products, she said. Many of the multinational companies are really not willing to or dont wish to participate in that low end of the market.

In 2007, Chinas 5.3 million tons of lubricants were divided into 46 percent industrial, 39 percent commercial and 15 percent consumer (automotive), Kline estimated.

This is different from some other, more mature countries such as the U.S. in that Chinas consumer market only accounts for 15 percent of total, Agashe said. Until the last 10 to 15 years, most people in China were not able to own a car. Vehicle ownership hadnt come down to common people, but it is changing very rapidly, Agashe noted.

Sinopec and PetroChina dominate the industrial market, with a 64 percent share. MNCs and local blenders have 18 percent each.

MNCs share is highest in the consumer market where they have a 58 percent share, compared to 21 percent for local blenders and 13 percent for local majors.

People who are now owning cars in China are extremely passionate about their vehicles, she explained. You read different articles about car clubs springing up in China. Theres a whole different subculture thats developing in China. They really buy into the brand messages and quality messages by MNCs.

In recent years, the local majors in China have strived harder to compete on quality. In the last, I would say, five years the local majors – more so Sinopec – they really want to take this competition from the MNCs head on, Agashe said. They invest in R&D, invest in proving their products performance. Some of their products are pretty much in line with the MNCs. No longer is that quality spectrum a big difference, especially in the consumer segment.

Local majors lead in the commercial segment with 45 percent of the market, compared to 29 percent for MNCs and 26 percent for local blenders.

Agashe said direct sales account for a very small portion of the commercial automotive segment as well as the consumer automotive segment. With industrial products, about 60 percent of total volumes are sold direct. The consumer and commercial automotive segments are typically sold through distributors.

If youre focused on the industrial segment, it might be important for you to engage a direct sales force, Agashe emphasized. However, if you want to be a player in the automotive segment, you also need access to a good, solid distributor network.

Fragmented market
Agashe said China can be divided into six economic market regions based on criteria such as population, GDP, income, infrastructure and culture.

Its really not a good idea to have one common strategy for all of China, Agashe said. We dont think one strategy, or one product is going to resonate in all different regions and provinces. You have to look at it from a geographic standpoint because of the value chain, but more importantly, you need to look at all of these regions from the level of economic development, and then you can have specific strategies and tactics for these segments. What works in the border part of China may not work in the interior of China.

Agashe explained that China is considered a fragmented market because there are end users that are very different from each other. There is a coexistence of imported, state-of-the-art and outdated vehicles and equipment. In the interior regions we see a lot of outdated vehicles. She said there is a lot of fragmentation in terms of age, type of equipment, where equipment was produced, and the technology that was used.

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