A Growing Market

A global recession caused auto sales in Russia to drop steeply in 2009, but the industry recovered rapidly the next two years. From 2009 to 2010, productions of cars, trucks, light commercial vehicles and buses nearly doubled, from 725,000 to 1.4 million, according to Dmitriy Shakhvorostov, technical service adviser for Russia and the Commonwealth of Independent States for additive supplier Evonik. In 2011, the number rose to 2 million.

The increase was largely due to a government cash-for-clunkers program aimed at spurring the economy, so analysts do not expect those growth rates to last. Still, industry pundits do expect annual sales to jump 55 percent by 2017, said Maxim Matuk, an analyst and adviser with Moscow-based RPI, organizer of the Lubricants Russia conference.

Sales in Europe are declining, but Russian demand is growing at an annual rate of approximately 14 percent, Shakhvorostov said.

David Lancaster, marketing manager for Europe, the Middle East and Africa at additive supplier Lubrizol Corp., cited Ernst & Young projections that commercial vehicle sales will grow at the same 14 percent rate through 2015. Lubrizol contends that domestic brands still dominate the market, accounting for 68 percent of annual sales. Six percent of sales were locally assembled foreign brands. Imports of new vehicles accounted for 19 percent of commercial vehicle sales, and the remaining 7 percent were used imports.

Original equipment manufacturers Gaz, Hyundai and Mercedes – based in Russia, South Korea and Germany, respectively – witnessed steady sales growth of medium commercial vehicles, Lancaster said, followed by other foreign brands. The heavy-duty segment is dominated by Russias Kamaz, but foreign brands are growing faster.

Local brands maintain a stable market position, Lancaster said, primarily due to an import duty of 25 percent on most new heavy-duty trucks and a prohibitive import duty on used foreign trucks older than five years.

Modernizing Fleet

Engine oil demand should not rise as fast as vehicle sales, speakers said, partly because some existing vehicles will be taken off the roads and partly because new vehicles generally consume less lubricant. Still, observers predicted modest growth in lube demand. Lancaster cited projections by Kline & Co. consultants that engine oil consumption will rise 14 percent by 2021 to 548,000 metric tons per year.

There seemed consensus, though, that the rise in quality will be more important. This development, speakers said, is tied to modernization of the countrys vehicle population. There is indeed much room for progress on that front, explained Alexander S. Medzhibovskiy, board chairman of Qualitet Group, a Moscow-based lubricant additive supplier. The countrys passenger car population is expected to approach 40 million this year, he said, and half of those vehicles are 10 years or older. One third is at least 15 and only 29 percent are younger than five years.

The heavy-duty truck population – 3.6 million last year, Medzhibovskiy said – is even older. Eighty percent of those vehicles are more than a decade old and half are older than two decades.

But the average age of vehicles is falling as sales rise, and car sales jumped 60 percent from 2003 to 2013, according to Medzhibovskiy. Lada, manufactured by Russias Avtovaz, remains by far the best-selling brand, but its numbers on the road plateaued in 2009. Meanwhile, the number of foreign models has risen steadily so that they accounted for half of all vehicles in 2012.

Foreign models tend to require higher quality lubricants, and although the number of Russian models is rising much more slowly, Medzhibovskiy said domestic manufacturers have made design advances, and that the quality of lubricants that they require is rising.

The Russian fleet has significantly rejuvenated, he said, and the demand for high-quality lubricants is steadily increasing.

Currently 30 to 40 percent of passenger car engine oils consumed are equivalent to API SF or SG, but that portion of the market is falling, he explained. Oils equivalent to SL account for 40 to 50 percent of demand, and this portion is growing. Ten to 15 percent of the market is SJ oils and 10 percent is SM.

Lancaster pointed to projections that engine oils will upgrade by another measure. In 2011, he said, 42 percent of engine oils consumed in Russia were monogrades, compared to 45 percent for SAE 15W-40 and 13 percent for 10W-40, both of which are multigrades. By 2021, he said, the portion of monogrades is expected to fall to 32 percent, while the shares for 15W-40 and 10W-40 will increase to 51 percent and 16 percent, respectively.

Lancaster said Lubrizol sees a variety of trends in commercial vehicle designs that will affect engine oils needed in Russia, as well as neighboring countries. These include increased power densities, rising attention to fuel economy and pollution controls, plus demand for better durability.

On the streets of Moscow and other Eastern European capitals we see new equipment of such OEMs as Daimler, Volvo and MAN, for example, he said. The latest models of trucks of these OEMs have higher power density, and as soon as we start talking about smaller oil sumps it translates to a higher performance for the lubricants.

Oils for New Vehicles

RPIs Matuk said demand for factory-fill engines oils is growing at a healthy rate in Russia, albeit from a tiny base. In 2011, he explained, automobile manufacturers purchased 10,500 t/y of crankcase fluids for vehicles coming off assembly lines. This amounts to 3 percent of the countrys total engine oil market, but RPI predicts that volume will increase greatly by 2017 because of increasing automobile production.

Domestic and foreign companies manufactured 1.7 million passenger cars in Russia in 2011, Matuk said. In five years, that number is expected to reach 2.7 million, pushing demand for factory fill passenger car engine oils from around 5,600 t/y to 8,600 t/y. Production of commercial vehicles and trucks is forecast to rise from 207,000 to 300,000 by 2017, which should raise demand for the engine oils that fill them from 4,100 t/y to 6,000 t/y. Buses and agricultural vehicles are following similar trends.

Matuk said factory-fill business has advantages and disadvantages. The negatives include the small size of the segment and the fact that low volumes reduce profitability almost to zero. Manufacturers set performance requirements that are tougher than service fill, and tests and approvals for factory-fill business are more expensive. At the same time, factory fill does lend itself to long-term relationships with OEM customers, and oil marketers can use factory-fill accounts as a tool to promote their lubricants.

A growing base of end-user equipment, rising demand, demand for higher quality – one could certainly find poorer prospects than the outlook for Russias engine oil market.