All of this means that lubricant consumption in much of the region will continue shrinking in coming years, an industry analyst told the ACI European Base Oils and Lubricants conference here in September. Geeta Agashe, vice president for energy at Kline & Co. consultants, said this will create big challenges for lubricant suppliers based there. To thrive, she said, companies will need to focus on the growing demand for premium lubes and to devote more attention to foreign markets.

Wreck of the Recession

As Agashe noted, the recession hurt the lubricants industry worldwide. Global demand peaked in 2007 when it reached 40 million tons. The recession hit, and by 2009 demand had sunk to 35 million tons. After that, many markets began to rebound, in particular Asia and South America, where demand has now climbed back to pre-recession levels. According to Kline, global demand was 38 million tons in 2011.

By product, passenger car and heavy-duty motor oils accounted for 43 percent of the total global lubricants demand in 2011. Process oils accounted for 14 percent, hydraulic fluids for 9 percent, general industrial oils for 8 percent, industrial engine oils for 7 percent, metalworking fluids for 6 percent and other oils for 9 percent. Grease demand last year accounted for 3 percent of the total global lubes demand.

Global demand is not where it was in 2007, but fortunately for us it is on a recovery path, Agashe said. The big picture is that North America and Europe stagnated and consume less lubricants now, whereas the Asia-Pacific region has become a world epicenter for lubes consumption, accounting for 42 percent of the total global demand.

A few regions have continued to lag, she said, with Europe losing the most ground. In fact, the regions ranking against the rest of the world has been slipping for a number of years. In 2004 Europe consumed 29 percent of the worlds lubricants, but today it consumes only 18 percent, Kline estimates.

There are many reasons why it happened, Agashe said. For one thing, population in Europe is falling, meaning there are fewer people to consume lubricants. In addition, a significant number of companies have moved factories to other regions, meaning that their lube consumption goes with them. In general, Europe uses higher quality lubricants than other regions, and this leads to longer drain intervals and reduced volumes.

Kline reported that Russia, Germany and the United Kingdom placed among the top 10 lubricants consumers in 2011 globally, accounting for 4, 3, and 2 percent, respectively. But she added that the industry is undergoing large geographical shifts. At the top of the list, the United States once accounted for 25 percent of the total lubes demand, but has fallen below 22 percent. Observers agree it is only a matter of time until China passes the U.S. to become the largest country market.

Some European markets will probably move down, too, she said, predicting that 10th place U.K. will continue to shrink, and will be replaced by Indonesia. We are expecting more Asian countries to make it to the top 10, and some of the mature markets to drop out. Agashe listed 15 countries where Kline sees potential for outstanding growth in lube demand volumes, but only two of those – Russia and Turkey – are even arguably part of Europe. The others are China, India, Brazil, South Korea, Indonesia, Vietnam, Egypt, Philippines, Pakistan, Bangladesh, Mexico, Iran and Nigeria.

After that group, Agashe said, the next European country with good potential for volume growth in lube demand is Ukraine.

Economic Indicators Gloomy

Agashe said it is no great mystery what leads to higher lubricant demand: Increases in gross domestic product make a reliable gauge. GDP is very good indicator, except that it follows wider swings because demand is measured at marketer sales level, not at the final consumer level, making it a poor indicator for year-to-year performance, but a good long-term indicator, Agashe contended. She explained the wide swings are caused because markets expecting a surplus of material produce less to reduce inventory; when a market expects growing demand it tends to build inventory.

It should come as no surprise, then, that lube demand will likely suffer in European countries with troubled economies. Whats going to happen to Greeces economy, whats going to happen to Italy or Spain is a big question mark, she observed. And when theres uncertainty in the market place, people tend to sit idle and watch, and there are no significant movements. That situation doesnt help recovery.

Agashe emphasized that the situation in Europe is not hopeless. Lubricant companies can succeed there, she said, but they need to focus on value rather than sales volumes. The good news is that parts of Europe have proved very receptive to higher quality lubes, and higher quality lubes tend to yield higher profit margins.

But based on performance, Western Europe is a very sophisticated market, she said. It uses [much] higher volumes of pure synthetic and synthetic lube blends that allow extended drain intervals, and that impacts the overall consumption in the old continent. Synthetics and semi-synthetics account for approximately 45 percent of lubricant demand in Germany, Kline estimates. They account for more than 30 percent in France and the U.K., about 20 percent in Russia and nearly as much in Italy.

Germany uses the most sophisticated lubricants with highest penetration of fully synthetic lubes and semi-synthetic blends, Agashe said. She expects that penetration of these categories will continue to rise across the continent, and that this will further contribute to declines in consumption. She concluded that use of synthetic lubricants would drive down consumption, even without the other economic factors that the Euro zone is dealing with at the moment.

The message seems clear: Lubri­cant suppliers should focus on – or at least pay due attention to – the upper tiers of their markets so that they can claim a piece of this profitable pie. Agashe said the industry trends also carry another important implication for business strategies. European companies, especially those in the more mature markets of Western and Central Europe, need more and more to venture away from home.

Lubricant marketers in Europe will need to look toward Eastern Europe and East of the Suez for organic growth opportunities and to expect competition to intensify in the coming decade, which will promote merger and acquisition opportunities, she said. Companies that show agility, speed and have global capacity and provide consistent products and flexibility will survive.

Russia, Germany in the Lead

Europeans consumed 6.6 million tons of lubricants in 2011, with Russia accounting for 25 percent of the market. The next biggest markets are Germany (16 percent), the U.K. (10 percent), France (10 percent), Italy (7 percent), Spain and Portugal (together accounting for 7 percent) and the combination of the Netherlands, Belgium and Luxemburg (4 percent). Together these markets account for 80 percent of lubricants consumption in Europe and over 90 percent of automotive and industrial production, according to Kline.

The consultancy found that Germany, Russia, the U.K., France, Italy, and Spain dominated vehicle manufacturing activity in Europe. From a qualitative standpoint, Germany has the largest per capita real GDP, along with the highest vehicle population and biggest automobile manufacturing industry. Germany produced 6.3 million units in 2011, compared to just 2 million for Russia.

Russia and Germany lead overall lubricants consumption by a wide margin, compared to other countries, due to their large vehicle population and strong manufacturing base. In 2011 Russia consumed almost 1.5 million tons of lubricants, while Germany consumed almost 1.1 million tons. The rest of the group is experiencing stagnation, which is not helping the European recovery, Agashe noted.

Economic activity in the Euro zone contracted in each of the first seven months of 2012, and the downturn was most severe in manufacturing, followed by services. The steepest decline came from Spain and Italy, but during these months Germany and France have seen some softness in demand, Agashe said.

Kline found that the short-term future of the European lubricants market depends on several factors. Stabilization and resolution of the Euro zone debt crises is first, and Agashe concluded that there have been positive steps. Another factor is the economy in Asia. Since the start of the recession, Germanys economy was buoyed by continuing strong demand for exports to Asia, which account for 20 percent of German exports. That demand faltered recently and will probably lead to a contraction in German manufacturing output in the fourth quarter of this year, Agashe said. Fortunately, she added, Asias economy still has strong fundamentals needed to support strong demand for imports.

Agashe cited a third factor as key to Europes lubri­cant market: energy prices. When high, they drive up costs for European producers and exert pressure on lubricant selling prices. When energy costs ease, lubricant suppliers gain some relief.

Overall, Kline expects demand volumes to continue presenting challenges for Europes lubricant industry. The only recovery comes from Russia, with an expected growth of 2.4 percent from 2011 to 2021, Agashe said. In Germany the firm forecasts modest compound average growth of 0.3 percent over the same time frame. Elsewhere, it expects lube demand to continue falling – at an average annual rate of 1 percent in Italy, approximately 0.75 percent in France, 0.5 percent in Spain and Portugal and 0.4 percent in the U.K. Kline also took a collective look at all of those countries plus Benelux, an area with combined consumption of nearly 5.3 million tons in 2011. The firm predicted demand there would fall to 5.1 million tons by 2013 and then rise to approximately 5.6 million tons by 2020.