Russia Faces Lubes Slump


MOSCOW – LukOils Maxim Donde outlined gloomy prospects for the short term development of Russias lubricant market, citing impacts from the countrys economic recession, at last weeks fifth International Lubricants conference here.

With the Russian economy entering recession due to the fall of crude prices and after financial turmoil developed in Moscow earlier this year – the first since the economic failure in 1998 – industry observers and marketers have become more modest in their prognoses on the future of countrys lubricant industry.

Maxim Donde, general director of Russian oil giant LukOils LLK International lubricants arm, said the crises have reversed the positive trends in the whole industry. The countrys industrial production index during the first three quarters of 2009 has seen a 14 percent drop compared with the same period last year – the two-digit fall is obvious everywhere, including machine building, chemicals and automobiles production. The World Bank and International Monetary Fond are forecasting a 7.5 percent decrease in the gross domestic product in 2009, steeper than the 4 percent contraction estimated earlier this year.

Our analyses estimate that total consumption of lubricants for passenger cars in 2010 will be 10 percent less then in 2009. The situation for the lubricants consumption by commercial vehicles is more serious and may slump 20 percent, Donde said.

The Russian lubricant market is self-sufficient in terms of domestic production and consumption. The countrys total production in 2008, excluding the lubricant exports that have seen small growth in the last couple of years, outpaced the total domestic consumption. Companies without their own resources and with poor management in their whole production chain could be the first victims of the crisis, Donde said.

In Russia today there are surplus lubricant production plants, he continued. Shutting down the most inefficient of them could be one aspect of the market structural changes. Shut down of the operations, reduction of expenses, internal reorganization and cutting costs are some of the measures that enterprises should introduce to boost their production and competitive efficiency in times of crisis, Donde noted.

He confirmed that global economic downturn has seriously affected the productivity of LLK. In the first months after the crises appeared, the company reduced its operation by up to 50 percent of total capacity.

We had to create an anti-crisis committee consisting of our best specialists. The committee is winning the fight with the difficulties, and as a result we succeeded in maintaining the sales volumes on the same level as in 2008, while the share of sales of premium products have been increased by 10 percent, Donde stated.

Affected by the downturn, LLK had to reduce its investment program. Donde doesnt expect significant mergers and acquisitions in the Russian lubricant market in the foreseeable future. Vertically integrated oil companies such as Gazprom Neft, Rosneft, LukOil and TNK-BP do not feel they need to hand over or share their lubricant business with somebody else. However, LLK is staying with its previous plans for modernization, diversifying its product range and being more active in the international markets.

Looking long term, the company plans to invest up to $400 million by 2019 to boost its lubricant and base oil production capacities.

By cutting the expenses, we plan massive reconstruction of our plants for increasing our [API] Group III base oil output to 240,000 metric tons per year, while we continue the production of Group II base oil, Donde explained. This year we introduced new types of industrial oils by developing more then 50 products, including a range of compressor and turbine oils, low-viscosity industrial oils as well as oils for paper production machines. The company recently started production of automatic transmission oils for passenger vehicles and diesel oils as well as synthetic automotive oils with 5W-30 viscosity.

The major Russian lube producer is confident about expanding its operations in developing markets. LLK operates a blending plant in Romania with its own logistic center, where production of its Avangard and Lyuks lubricant brands for passenger vehicles takes place, nurturing sales in Southeastern Europe. Recently LLK has established a subsidiary in Turkey named LLK Yevraziya with its own dealership network and logistic center. LLK in September acquired Izmir-based Turkish lube producer Akpet, which has capacity of 12,000 metric tons per year.

LLK Yevraziya is among the top four lubricant suppliers in Turkey, according to Donde. With its operations there, the company plans to expand its activities in the Middle East, Africa and Southeast Asia.

In September 2008, the company started production of marine oils as well, by establishing its daughter company LLK Marine in the Russian northern capital Saint Petersburg.

As of 2008, LLK controls 45 percent of all lubricants manufactured in Russia, amounting to 1.4 millions tons output per year and holdsabout 60percent of the countrys lube exports. LLK markets its products in 20 countries around the globe.

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