Iran has long had a reputation of being a market for low quality lubricants – a nation where large chunks of the lubes consumed by automotive and industrial users are generally obsolete in developed countries. Observers cite several reasons, from the slow pace of vehicle modernization to the low quality of motor fuels and a lack of consumer awareness.
Some companies are working to raise standards and claim that progress is happening, among them Pars Oil Co., one of four integrated lubricant suppliers in the country. Pars said it has introduced better quality products, promoted consumer awareness and taken a variety of measures to optimize manufacturing. For all that, it seems progress does not come easily in a market blighted by economic sanctions, currency restrictions and volatile raw material prices.
Like its domestic competitors – Sepahan Oil, Behran Oil and Iranol – Pars supplies base oils and finished lubricants. It operates a lubricant blending plant in Tehran, adjacent to its base oil plant, which has capacity to make 160,000 metric tons per year of API Group I stocks. Founded in 1959, Par is now a public stock company that is part of a holding company closely aligned with the government.
Iran is the biggest consumer of lubricants in the Middle East with demand exceeding 650,000 t/y, according to Pars estimate. Numerous observers have said that the overall quality of that market is among the lowest in the region. For example, they say a significant portion of the engine oil used in passenger cars is equivalent to API SC – which U.S.-based American Petroleum Institute considers unsuited for American vehicles built after 1967 – and nearly half is no higher than SG, which is not prescribed for engines newer than 1993. Much of the heavy-duty diesel engine oil in Iran is said to be API CD or CE, standards that are 55 and 25 years old, respectively, and deemed obsolete.
Pars Executive Manager Ali Sadeghi Mojarad claims that describing the market as low in quality is over-simplified and misleading. The Institute of Standards and Industrial Research of Iran adopts engine oil standards, and its latest is equivalent to API SM, he said. Some Iranian lube marketers are offering products that meet the latest North American specifications – API SN for passenger cars and CJ-4 for heavy-duty trucks – and which are needed for the many new vehicles in Irans car park. In the past, the country was importing significant volumes of Group II and III stocks.
Still, Sadeghi acknowledged that significant amounts of substandard lubes remain in the market. He offered two main reasons. The first is purchasing power and a lack of awareness by consumers of the higher costs associated with using lower quality lubes, he said. The second is delay in vehicle fleet modernization in terms of advanced engine technologies, as well as renewing old vehicles.
Others have also cited the extremely high levels of sulfur in the countrys diesel supply – frequently as high as 10,000 parts per million – which renders irrelevant the sulfur-reducing strides that have been made in the most modern engine oils.
Demand for more modern engine oils rose in recent years thanks to an increase in the number of new Western-, Japanese- and Korean-branded vehicles in Iran, and Pars and other suppliers introduced products to meet that demand. But Sadeghi claims some suppliers have not done enough and have resorted to skimming – supplying cheap products without educating consumers on the benefits of higher quality oils. Sadeghi sits on the board of the Association of Iranian Standard Logo Holders, an organization charged with monitoring product quality and safeguarding consumer rights. He said Pars has followed a push strategy that uses distribution and advertising incentives.
We have gradually substituted higher performance products and [taught] the benefits of using higher performance products, he said, adding that the argument for better oils is financial. In terms of associated costs, lower performance engine oils will cost more, taking into account lower fuel economy and increased vehicle maintenance costs.
Adding Grease Capacity
Pars is already a dominant player in the domestic grease segment, claiming more than a 50 percent share of the 16,000 t/y market, but it recently built a second 2,000 t/y plant. The new facility stands along-side an existing 10,000 t/y plant, which according to Pars was running at full capacity. The new plant cost U.S. $5.1 million (4 million) and was designed by Pars engineers to minimize the use of foreign components. It will produce greases with lithium and lithium complex thickeners, as well as aluminum complex greases, mostly for the cement and steel industries.
Sadeghi views the grease market as a major opportunity for the company, and he added that the new plant is another effort to raise grease quality in the country. The domestic grease market is heavily skewed toward calcium-soap based products, in contrast with other countries that are dominated by lithium-based technology.
Just like the engine oil and industrial oil markets, he said, customer awareness of grease requirements for machinery is not sufficient to determine the right product. Because of that and end-user price sensitivity, machinery failure rates are high.
Sadeghi said its important to remain cost competitive when pushing higher quality products in a market thats been dominated by cheap products. To make that possible, the company has tried to make its finished lubricants operations as efficient as possible.
Pars Oil has the highest blending capacity in Iran, thanks to its unique plant and two simultaneous metering blending units capable of blending by continuous process, Sadeghi said. The percentage of right-first-time blends is about 99 percent. Rearranging of storage facilities reduced production times and costs. The company also lowered costs by replacing traditional suppliers and outsourcing some activities, and it changed pricing and sales policies to shorten payment collection times.
Maintaining profitability is not easy in Irans current economic climate. Sadeghi claims Pars has not been hurt much by international trade sanctions. While I do not deny the limitations of performing business activities in certain areas, Iran has long been facing different embargos which have made all industries convert threats to opportunities by adopting multi-sourcing procurement practices and [becoming more] multidimensional.
The lubricant market in particular has not been disadvantaged, he said. If you explore the Iranian lubricant market, new products meeting the latest standards are continually introduced and are available everywhere. We have seen a constant increase in oil change intervals, which means customers are becoming more aware of quality products.
Officials did acknowledge being hampered by other developments, among them a government decision in 2007 to sharply reduce subsidies for refining inputs. As measured by the local currency, base oil feedstock prices have almost quadrupled since 2009, while base oil production costs have tripled since 2007, Pars Planning Manager Majid Safdari said.
Addressing the ICIS Middle Eastern Base Oils & Lubricants conference in Dubai in October, Planning Manager Majid Safdari explained how feedstock prices would have eroded profitability of a typical but hypothetical Iranian base oil plant. Production costs would have exceeded sales revenues from 2008 to 2011, he said, even if one accounts for revenue from byproducts of base oil refining and ignores overhead costs.
Increases in feedstock prices also eat into margins for finished products, Safdari said. Since 80 to 99 percent of finished lubes are typically comprised of base oil, it has affected the margin of finished lubes. But refiners are trying to shift to higher quality lubes, which are less price-sensitive.
Despite the short-term damage to bottom lines, Safdari concluded that Iranian base oil companies will in the long run benefit from the reduction of subsidies. The industry has long since revised its expectations of high margins resulting from subsidy and has moved to a new level of activity based on market competiveness.
Safdari expressed some concern about the long-term availability of feedstock used by base oil plants. Although five Iranian oil refineries supply vacuum gas oil feedstocks for base oils, only one supplies a full range of viscosity grades, and three supply only one grade. In the near future, two refiners plan to install fluid catalytic cracking units and residual fluid catalytic cracking units that may threaten supplies of VGO.
Currently, all five of Irans base oil plants make API Group I stocks. Pars would like to see Iran producing Group II or III oils, and Sadeghi believes the country is well-suited to do so. First, its enormous oil and gas reserves mean that it should have plenty of feedstock for base oil plants. At the same time, Group II and III plants are more flexible than Group I facilities in the type of feedstock they use.
Two Iranian companies announced plans in recent years to develop Group II or III plants, but neither project proceeded, at least in part due to their inability to acquire necessary technology. ExxonMobil and Chevron are the main suppliers of catalytic technology used in such plants, but both are headquartered in the U.S. and prohibited by the embargo from doing business in Iran.
Leaning on Exports
Iranian lube marketers also have to cope with a sharp devaluation in the rial. Tehran sets official exchange rates, and until 2011 government-related companies were required to use this rate for export sales. There is also a flourishing unregulated market in foreign exchange, where the rial has depreciated sharply against the U.S. dollar since 2010. In October, the unregulated exchange rate fell to around 37,000 rial to the dollar, compared to a quoted central bank figure of 12,260 rial. Just since January the currency has declined by 50 percent.
Last year the government relented and decided to allow exporters to use the unregulated exchange rate, making sales easier for those that did so. Transactions based on lower exchange rates for the exporters currency are cheaper for the purchaser/ importer.
Safdari said such a switch would have made a big impact on the hypothetical base oil plant that he discussed in Dubai. Costs for making distillate aromatic extract, a byproduct, would previously have exceeded its sales price, but now it would become profitable again, lifting the whole operation back into the black.
Officials said the actual experience of Pars and other base oil producers was similar to this. Recent currency problems have contributed to exports, [and] they have increased exporters revenues from exported cargos in foreign currency, Sadeghi said.
Pars said it has undertaken an initiative to expand exports – a strategy aided by government tax incentives. According to Safdari there is an emphasis on emerging markets. Markets vary depending on the products and company [but] you may assume Africa, the Middle East and Southeast Asia as major ones, he said.
Iran still appears able to access lubricant technology and if necessary replace suppliers that are constrained by sanctions. Analysts say the Persian Gulf producer relies on China, particularly for additive technology, though Pars denies it. Iranian base oil producers still have potential export destinations in Southeast Asia, Africa and the Middle East, all of which have countries that are not part of the embargo.
Pars will take what it can get these days. It may not be business as usual but it is business nonetheless.