A burgeoning oil and gas sector and rising expenditures on infrastructure have increased the regions appetite for lubes used in the energy and construction industries. Moreover, general economic growth also encouraged expansion of other types of manufacturing and processing – and in turn for the oils and greases that they use.

For all that, small lubricant suppliers in much of the region have found it difficult to enter industrial markets. At the same time, these markets remain highly fragmented and in many instances do not offer critical mass for larger manufacturers. As a result, a segment with growing demand continues to be served by relatively few marketers.

Estimates about the size of the industrial lubes segment in the Middle East vary widely. Deducing demand volumes is notoriously difficult in this region, which is known for its opaque business culture and reluctance to disclose information.

It is almost impossible to get an accurate read on total market size for industrial lubes in the Middle East, a regional spokesperson for Shell said. We estimate it somewhere between 250,000 to 300,000 metric tons per annum. That assessment is similar to an estimate by Frank Bongardt, of German lube supplier Rhein Chemie, who pegs industrial demand at 279,000 t/y and 17 percent of the regions total lube market.

Rodin International, by contrast, believes the regions industrial lube segment is roughly twice that size – 530,000 t/y. The Dubai-based consulting firm says Iran is by far the largest market, with demand of approximately 150,000 t/y, followed by Saudi Arabia (97,650 t/y), Egypt (88,200 t/y), Iraq (62,000 t/y) and Syria (31,000 t/y). Those countries are followed by the United Arab Emirates (31,000 t/y), Yemen (24,000 t/y), Kuwait (12,400 t/y) and Oman (10,850 t/y), the firm said, then Jordan (7,750 t/y), Lebanon (7,750 t/y), Qatar (6,975 t/y) and Bahrain (3,100 t/y).

Not surprisingly, those numbers have been rising fastest in countries such as the United Arab Emirates and Saudi Arabia, where economies are expanding most rapidly. Industrial lubricant demand is high in markets that had industrial booms in the last decade, said Bander Al Theibany, marketing manager of Petromin in Saudi Arabia.

Industrial lubricants are generally classified in three categories – metalworking fluids, greases and general industrial lubricants. Metalworking fluids are used in applications such as cutting, drilling, grinding and forming. General industrial lubes are used in a broad spectrum of industries and include hydraulic fluids, turbine oils, gear oils, compressor and refrigeration oils, which together account for more than 75 per cent of the industrial segment.

In the Middle East, most demand comes from the oil, gas and petrochemical sector, but other uses are found in the regions sizeable aluminum and steel plants, and with heavy demand from the construction sector. Food grade oils and agricultural oils are widely consumed in Syria and Lebanon.

Across most of the region, the market is dominated by multinationals – such as Shell, BP and ExxonMobil – and the larger regional companies, including Saudi Arabias Petromin, and Abu Dhabi National Oil Co. and Emirates National Oil Co., both based in the U.A.E. Several international companies have established blending operations in Saudi Arabia, such as ExxonMobil, Fuchs, Gulf Oil and Total. Some regional companies have positioned themselves as toll suppliers including Gulf Petrochem, which supplies different grades of grease to BP and Caltex.

It is therefore no surprise that international and government owned oil companies, according to some estimates, control up to 85 per cent of the industrial segment in some countries. Smaller companies like Oil Zone, a lubricants blender and marketer based in Sharjah, U.A.E., are niche vendors offering specialized products to the power generating and construction sectors. Some local companies develop relationships with customers by developing products specifically for their machinery and operations.

The Iranian market stands out from the rest of the region for several reasons. First, it is the largest regional consumer, but its sprawling petrochemical and industrial sectors are all but off limits to many of the largest international suppliers due to increasingly weighty trade sanctions. Regional firms conclude the embargo is a chance to diversify while domestic Iranian lubricant companies readily supply a captive market. As a result, the Iranian industrial lube market has far more local suppliers than any other country in the region.

Defining market share is difficult in Iran, but Behran Oil is the market leader followed by Pars Oil, which leads in gear oil, said Mehrdad Vajedi, principal of Rodin. Iranol and Sepahan are key players in general lubes like hydraulic and gear oil. He added that the market is densely populated, with more than sixty active companies. Sadid Ravangar, RSA Lubricants, Maral and Fouman Chimie have strong positions in grease, and Mehrtash Sepahan and Resco, Ravankaran Sanaat, Behzist Shii, Saman Shimi and Atlas Mica supply the metalworking fluid market.

Industrial lubricants sold in Iran are predominately based on API Group I base oils, Vajedi added, but the market is slowly gravitating towards Group II as key investments are scheduled to come on stream in the next five years. It is the improved performance characteristics of Group II base oils that will likely be the main driver toward conversion. Group II stocks generally offer better oxidation stability, longer change intervals and a lowered treat rate of additives.

Other countries in the region have far fewer suppliers of industrial lubes than Iran. Although barriers to entry are not strong, they are intensifying, and only a handful of local companies currently supply the market. One of the key reasons is consumers have a preference for the recommendations of original equipment manufacturers and the overall service support offered by the larger companies, said Zuhair Barakat, lubricants marketing manager for Shell Middle East.

We are very active in construction and power generation across the region given our global OEM endorsements and local value propositions that include lubricants-related services. However he acknowledges local companies have an intrinsic advantage. They have the dominant share of the market due to government support, their strong local manufacturing base and ability to provide low cost products.

Barakat declined to discuss Shells market shares in different countries. He did say that Shell sees Saudi Arabia and Qatar as major markets due to forecast government expenditures, adding that the oil giants share in the U.A.E. is high.

Irrespective of the presence of some successful regional players, recruiting a large sales force, brand development and providing after-sales support is a deterrent for new entrants, Barakat added. Petromins Al Theibanysaid said there are several other reasons that inhibit new entrants in the region. Technical experience to gain the required licenses is difficult for local companies, he said. The exception would be Petromin, a local company with over 40 years of experience.

He thinks the competitive landscape and heavy cost-cutting will keep the door firmly closed to would-be entrants in the short-term. I dont foresee local interest due to the aggressive strategy of the multinationals. The cost-cutting approach, combined with the increase of base oil costs, leaves limited margin for current or new players.

Preoccupation with cost has meant that sub-grade lubricants are common-place in many Middle East markets. However, some regulators are taking steps to clamp down on inferior quality of automotive lubricants, and the effects may spill over into the industrial segment. In a set of voluntary guidelines, the Emirates Standards and Materials Authority in the U.A.E. will issue minimum quality assurance specifications for engine oils, a move that could force the closure of some supply sources facing costly upgrades proposed by the regulator.

On the other hand, some companies will upgrade their facilities, and in cases where companies produce both automotive and industrial lubes, the quality of the latter should also rise. Since the U.A.E. is a huge lubricant exporter, these benefits could well be felt in other countries.

One company contributing to the flow of exports is Emirates Lube Oil Company (Elco), which is based in Sharjah. It supplies a particularly diverse range of industrial lubricants to an equally diverse number of countries in the Middle East and northern, central and western Africa. Most of its industrial supply is varying grades of hydraulic, gear, quenching, compressor and cutting oils.

Ali Abdi Farah, marketing manager at Elco, says countries such as Iraq are showing good growth as their economies gradually recover. He added that Enoc and Adnoc control large shares of the regional market, but Elco has succeeded in meeting demand in niche applications and in countries that have mature industrial sectors.

Emirates National Oil Co., or Enoc, a diversified lubricants company based in Dubai, is seeking to consolidate and grow share with the commissioning of a 150,000 t/y lube blending facility in Fujairah, U.A.E., that could radically alter regional supply side dynamics. With many lubricant companies operating at full capacity and little or no room for expansion, Enoc thinks there is an opportunity to grow volume and sales and plans to earmark a high proportion of production for export. The company expects approximately 30 percent of production to be industrial lubes.

T. R. Kumar, Enocs manager of lubricants technology, said Saudi Arabia and the U.A.E. are its largest target markets. When the plant is commissioned, he is in no doubt new entrants will find it expensive to enter the market and will wait a lot longer for a return on investment.

Not many oil companies get involved in marketing industrial oils on the account of OEM approvals, Kumar said. A lack of technical expertise in industrial lubricant formulation often means end users lack confidence in all but a few companies, he said, adding that product liability issues also act as a major deterrent for aspiring suppliers. Enoc supplies the industrial market with a deep range of hydraulic oils, gear, turbine, transformer and process oils primarily for the construction and power sectors and cement plants.

Passenger car motor oils have been and continue to be the mainstay of Middle Eastern lubricant companies. However, the Middle East and the Arabian Peninsula more specifically have seen dramatic expenditure on infrastructure in the last five years that substantially increased demand for industrial lubricants.

With investment in infrastructure and heavy utilities set to continue, the outlook for the industrial lubricant market appears positive. As quality standards evolve, smaller companies may be forced to focus on lesser developed markets for business using countries like the U.A.E. as export hubs.

The combination of low margins and major investment costs could be prohibitive to companies without long-term visions.