Middle East Gears Up for Higher-quality Lubes
The Gulf’s hydrocarbons wealth means plentyof clientele for dealers of high-end cars thatrequire high-end engine oils. Although currently a trickle of premium grades in theregion, Mark Townsend suggests that this may turn into a river of demand from regular vehicles.
The Middle East may be a volatile region but its better-off, more stable nations will always be a magnet for expensive cars. Since these vehicles require high-performing lubricants, the thinking is that they will raise the floor of automotive lubricant quality in the overall vehicle parc.
Middle East markets have been traditionally defined by low-tier, mineral-based products, and conventional wisdom has it that because of the regions high year-round temperatures, high viscosity equals better performance.
Predictions of a shift in quality have long been on the program at Middle East base oil conferences, but the move has not materialized. There has been some recent momentum and the question is: Why now?
Speaking at the ICIS Middle Eastern Base Oils & Lubricants Conference in Dubai in October, Kailash Sawant, Lubrizol Corp.s manager for engine oils in India and the Middle East, believes the regions transition to higher-grade lubricants and lower viscosities is down to a combination of several factors.
One of them is that by 2025, more than 12 million new vehicles will join the Middle Eastern vehicle parc, bring a new wave of engine oils that are at least compliant with the American Petroleum Institutes API CK-4 and the International Lubricant Specification Advisory Committees ILSAC GF-6 standards, Sawant said.
In a sign of the regions increasing visibility on the lube radar, the API recently opened an office in Dubai that many hope will speed up consumer education in the use of higher-quality engine oils.
There is also no escaping the global push for lower emissions and fuel economy, which is driving research efforts to produce the next generation of synthetic lubricants. At the same time, consumer preferences for greener products in Europe and North America are now influencing choices in the Middle East, particularly the Gulf.
The Regulatory Noose Tightens
Another factor that has opened up the Middle Easts market to higher-spec lubes is regulatory pressure on European, American and Chinese carmakers that export to the Gulf, Sawant indicated. On current trajectories, permitted U.S. passenger car carbon dioxide emission levels could fall to 102 grams per kilometer by 2030, with European Union passenger car emissions projected to come down to as low as 69 g/km in the same period. China, the worlds largest automotive market, is also increasingly bearing down on emissions, in parallel with an unprecedented state-driven campaign to promote low-emissions vehicle usage.
Sawant said that new legislation has pushed original equipment manufacturers to introduce new engine technologies that require higher-specification lubricants. Previously rare terms such as low-speed pre-ignition, direct injection and gasoline or diesel particulate filters are now commonplace. In the past few years, lubricant and additive companies have raced to meet performance challenges set by improvements in engine hardware in both passenger and commercial vehicle markets.
Modern commercial vehicles are typically fitted with diesel particulate filters to sift harmful soot. But the filters performance can be compromised due to the buildup of sulfated ash, phosphorus and sulfur, or SAPS, from the lubricant. Maintaining the performance of the filter requires lower-SAPS lubricants that have emerged from pioneering innovations in engine technology. It is a similar situation with passenger vehicles. Many are equipped with turbocharged gasoline direct injection systems and using a sub-optimal lubricant can cause LSPI, a potentially catastrophic issue exacerbated by piston failure.
Counting the cost of failure exceeds the inconvenience of replacing an engine or vital components. For fleet operators it could mean lost production and damage to corporate reputation. That is an easy argument in favor of higher-quality lubes, Sawant told conference delegates in Dubai.
When it comes to the Middle East, there are mounting expectations that as regulations become more stringent, the balance will tip in favor of wider adoption of higher-specification products. Some 65 percent of vehicles exported to the region are from markets with the strictest emission standards, according to Sawant – 36 percent of imports from Europe compliant with Euro 6, 15 percent from Asia meeting Euro 6 and 14 percent from the U.S. compliant with EPA Tier 3 standards.
Modern vehicles need better technology, and going forward API CK-4 with better oxidation and ability to manage after treatment devices with low SAPS, will be important in HD applications, Sawant added. The passenger car segment also continues to evolve as the market gravitates to API SN. In both scenarios, high-temperature, high-shear properties are crucial for the formulations and durability of low-viscosity oils.
Does that imply a direct correlation between hardening standards and use of higher-spec lubricants? Not quite.
What the Data Says
According to GfK, a German company that provides behavioral data and consumer insights from point-of-sale transactions, the shift to semi and full synthetic oils in the Gulfs two biggest markets is already underway. But in Saudi Arabia, the regions largest market, there is still a lot of progress to be made. GfK estimates the penetration of full synthetics at 11 percent and semi-synthetics at just 5 percent. Despite outlawing monograde oils, low-specification products continue to be sold in the aftermarket, says GfK. The situation in the neighboring United Arab Emirates seems more progressive, with semi and full synthetics each accounting for 16 percent of the market.
Yet the broader market is undermined by a flourishing trade in counterfeit engine oils, notably in Saudi Arabia. (See also Everyones Business, p. 9) In remarks at the Dubai conference, Samir Nawar, chief executive of Petromin Corporation, a manufacturer of automotive and industrial lubricants, estimated counterfeit oils accounted for approximately 16 to 18 percent of the Saudi market two years ago. Measures by the Ministry of Commerce and Investment, together with pressure from local industry groups, have seen the figure fall to around 12 percent. That is still a sizeable amount and highlights the challenge facing the industry to improve consumer awareness, particularly in rural areas.
The much-touted need for better-quality lubricants also takes place at a time of a shift in the relationship between base oil refiners and additive companies. An executive from Bahrains state refiner Bapco believes alliances will become more collaborative. This is industry-speak suggesting refiners will share some of the multimillion-dollar costs of getting technical approvals in lucrative but regulator-heavy markets, such as Europe and North America.
Earlier this year, Bapco signed a 10-year agreement with lubricant additive company Lubrizol Corp. and has inked non-disclosure agreements with both Chevron Oronite and Infineum, also additive companies. It also recently secured approval on Europes REACh chemicals register, allowing it to be imported into the bloc.
The high cost of market entry for new base oil refiners has triggered a two-tier market that might become a permanent fixture. So-called approved base stocks complying with OEM standards, such as Volkswagens benchmark 504/507, attract premium prices over their non-approved counterparts. In some instances, that margin can be more than U.S. $200 per metric ton, according to Denis Varaksin, director of base oils and waxes at the Berlin-based trading company DYM Resources GmbH.
OEM approval increase market for these products by a lot [and] to get them needs a lot of time and money, Varaksin said.
Despite margin pressure on lubricant blenders, unapproved base oils are not encroaching significantly into the engine oil market, and that is good news for nascent Gulf production.
Numbers of applications without approvals are limited to mostly industrial lubricants [and] the more refineries will get approvals, the smaller the gap between approved and non-approved Group III will be, he added.
Lubrizols Sawant estimates there are more that 3 million tons of API Group II and III produced by refiners in Bahrain, Qatar, Saudi Arabia and the U.A.E. Potentially abundant Group II and III supply will be a critical enabler for modern formulations, he said.
Still, the quest for lower viscosity engine oils bolsters the position of additive companies as technological developments in engine hardware increase the complexity of lubricant formulations. That is fueling speculation how refiner or additive company relationships will unfold, as fears over commoditization and overcapacity stalk the base stock industry.
Sawant believes the refiner-additive company axis will become more important as the performance of engine oils is stretched even further. It is not only about lab tests, it is about testing in engines, testing in the field – this is how a product is developed, he said.
State-owned refiners such as Abu Dhabi National Oil Co. appear to be betting big on the future of the lubricants market. During a presentation at the same conference, Ali Yaslem Alsadi, vice president of Adnocs lubricant division, estimated that the global lubricants gross margin value pool (defined as total profits earned in an industry at all points along the industrys value chain) could grow almost 45 percent by 2035, accentuated by the profitability of high-performance lubricants. That is in spite of anticipated market upheaval from electric vehicles, though the possibility of wider disruption to the lubricants market could strike a blow to predicted growth plans, Adnoc believes.
Meanwhile, GfK says there are problems closer to home. National and international oil companies have lost market share in premium segments, such as synthetic oils, to more agile and cheaper competitors. In the U.A.E., year-to-date market share for premium brands is 33 percent in 2019 versus 42 percent in 2018. GfK says mid-range and tier-three brands are snapping at the heels of their larger rivals that has seen them grab a 40-percent share of the market, as of the end of July.
A Bright Future?
The Middle East will switch to higher-quality lubricants sooner rather than later. But in the wake of all the discussion of when this will happen, geopolitics is never far behind. If buyers are prepared to bust U.S. sanctions on exports, Iran could still upend base oil markets with plentiful supplies of Group I base stocks at giveaway prices to local blenders.
Another, albeit minor, demand driver could be the disruption cause by EVs to passenger car motor oil sales from EVs. That disruption is still a fair way off, even in markets where EV penetration is gathering pace, but it could be an opportunity rather than a threat for regional Group II and Group III refiners and lubricant marketers looking to find alternative markets for product if demand in Europe and the Americas dwindles.
What is more like to weigh heavy on profits in the short term is the continual evolution of higher-specification engine oils, as longer drain intervals and the greening of the lubricant sector reduce consumption.
In July 2019, API announced two new ILSAC specifications – GF-6A and GF-6B – and a new API Service Category denoted API SP in a clear signal that engine oil performance requirements are set to tighten even further.
Putting it all together, higher-specification products are coming to the region. All that remains is whether there are a significant number of consumers to make the leap beyond the minimum regulatory requirements.