Consumption
Kline estimated global lubricants consumption in 2008 at 38.2 million metric tons, a 3 percent decline compared to 2007. The reason is the lubricants industry felt the impact of the recession only in the last quarter of 2008, Phadke explained. And in fact during the first half of 2008, consumption was actually growing. As a result, the full year 2008 will end not too bad compared to 2007 – most of the impact will be felt in 2009. The study forecasts a steeper decline to 32.7 million tons in 2009.

There are essentially two key drivers for the reduction in demand, according to Phadke. The first one is the high fuel prices during early part of 2008, which caused a reduction in demand of passenger car motor oil, he said. The other important driver is the collapse in industrial production in latter half of 2008 and early part of 2009, which caused reduction in consumption of industrial and commercial lubricants.

By region, the average decline in lubricant consumption between 2007 and 2009 is projected to be 11 percent for North America, 9 percent for Western Europe and 7 percent for South America. Asia Pacific can expect a drop of 4 percent, and Eastern Europe – with Russia the biggest contributor to the decline in demand – and the rest of the world will shrink about 16 percent.

He noted Asia Pacific has had a very mild recession. This actually hides the fact that in 2008, Asia Pacific consumption grew with respect to 2007 and then experienced a significant drop in 2009, Phadke said.

Factors
According to Klines study, metalworking fluids, PCMO and heavy-duty motor oil experienced the largest contraction in lubricants demand between 2007 and 2009. The demand contracted in the automotive industry, rolling mills, fabricating metal products, and machinery manufacturing – all of this severely affected the demand for metalworking fluids.

Phadke observed that demand didnt go down equally for all categories of metalworking fluids. Consumption of protection fluids is quite strong, he continued. Perhaps it might grow because products are now lying in inventory for a longer amount of time, and theres a greater need for protecting fluids.

He suggested that PCMOs earlier decline was due mainly to high fuel prices in the early part of 2008, coupled with the general sense of consumers wanting to be frugal. With fuel prices easing, PCMO consumption should rise, but it would not increase to pre-recession levels, Phadke added.

HDMO consumption is likely to stagnate for some time because both on-highway and off-highway applications are stagnating. On the off-highway side, the construction and mining sectors are both in the doldrums, though economic stimulus packages might help to increase some of the demand, he stated. On the on-highway side, he pointed out that trucking and logistics are also doing badly.

Process oils have had a relatively easy recession as a whole. While consumption of process oils did see significant contraction – due to the decline in the tire industry – white oils, which are consumed in pharma and food applications, and transformer oils used in energy transmission both did not show any significant decline in consumption, he said.

Impacts
Phadke recounted that for its outlook, Kline examined how deep the decline in consumption has been, how long the recession will last in different country markets, and how fast or slowly the recovery would occur. According to the International Monetary Funds July 2009 World Economic Outlook, all major economies are projected to come out of recession by 2010. Based on these inputs, what we see is that in the most likely scenario, by 2012 the [global] lubricants market would be returning to 2007 levels. Thats a key observation, he stated. But the composition of the market is likely to be different from what it was in 2007.

In the finished lubricants business, we expect there would be a slowdown in new product development, as well as in the development of new quality levels, Phadke continued. Capital expenditure for projects is continuing as of now but its continuing more slowly. We also see that companies which are diversified – which have a full portfolio of completed products, which are represented in all of the key markets – these companies are weathering the storm much better than companies which havent had a full products portfolio.

Projections suggest 2009 and 2010 will be very tough years for the lubricants base oils industry because of the global decline in demand. We are to expect that plant owners will take more intensive scrutiny of their Group I plants with a view of evaluating their long term viability, he continued. Demand is moving away from Group I type base stocks to Group II and Group III type base stocks, and there is a trend for reducing Group I supply. This recession might just kick-start that process, of the closure of Group I plants.

New lubricant base stock plants that are already on stream may find their market development to be very difficult at first, Phadke said, because lubricant blenders generally are not in a frame of mind now to entertain new suppliers. Their priorities right now are to increase their volume, he continued. We may essentially see that a lot of the new Group II and Group III supply would be used up in Asia, in terms of substitution push, because theres a lot of Group I being consumed in Asia.

Phadke noted that new projects that have been planned or are under construction will probably be slowed down, and their startup dates pushed back. This is to be expected due to the uncertainty of the recovery in the market, he explained. Because with a recession, the prices of raw materials, project execution and manpower have all come down, and hence projects that are being worked on right now could see a savings in their capital expenditure.

The lubricant additive industry will likely face a tough time during 2009 and 2010, according to Phadke. PCMO, HDMO, marine oils and metalworking fluids account for nearly 90 percent of the global lubricant additive consumption, he started. Incidentally, these are the products that have shown the most decline in consumption. Thus the additives industry will have a very difficult time in 2009 and 2010.

In the Americas region, he pointed out, sales of additives didnt actually decline significantly in 2009s first quarter, but did start going down in the years second quarter and onward. We really dont know the reason for this, Phadke acknowledged. What I suspect is lubricant blenders were buying ahead, stocking up in advance of the GF-5 category. In any event, lubricant blenders are now looking to additive companies to help them save costs.

Adjusting
Lubricant blenders have gone through several stages in response to the decline in consumption, Phadke said. There was a stage of waking up to the prices, people talking about how things were going bad. This led to a stage where there was a momentary panic in the market, and people were working off their inventories; they had stopped making all purchases, and were supporting their business on the basis of the inventories that they had.

Blenders have since moved to a different phase. Companies are again maintaining some inventory, theyre renegotiating with their suppliers, and theyre looking at the purchase portfolio that they have. Theyre trying to decide if they need so many SKUs and theyre trying to reduce the number of SKUs that they have so as to reduce their overall purchases.

Phadke said the marketers Kline interviewed said they had not yet contemplated any reduction in marketing programs or jobber support. Anything that helps increase sales volume is still something they would like to do and continue doing, he continued. Marketers have also said that there is as yet no cutback on the budget for product development. However, he added, it must be said these products are progressing more slowly.

For more information on the study, visit http://www.klinegroup.com/reports/y676.asp.