A Diverse Market

When it comes to base oils and lubricants, opinion is divided on the future of the market. Kline & Co., a management consultancy, remains bullish in its outlook for the lubricants market in India. According to Klines Milind Phadke, finished lubricant demand has grown from 1.6 million tons in 2007 to 2.1 million tons in 2012, a compound annual growth rate (CAGR) of 5.7 percent. India has overtaken Japan to become [the] third largest market in the world for finished lubricants in volume terms, lagging behind only United States and China.

Iran has been a long-standing supplier of base oils to India, and Klines figures are broadly in line with estimates by Iranian refiner Pars Oil Co. Majid Safdari, planning manager at Pars, says the market was around 2.1 million tons in 2013 and worth U.S. $4 billion.

In what is a highly price sensitive market, Kline says industrial lubricants represented more than one-half of finished lubricant demand in 2012. Process oil, the biggest single product category, accounts for about 47 percent of total industrial lubricants.

The diversity of the economy and its large agricultural sector mean that metalworking fluids, hydraulic fluids and general industrial oils are also major segments. Commercial automotive lubricants are the second largest market at about 37 percent of finished lubricant demand in 2012, Kline calculates.

Indias earlier strong economic performance continues to resonate in the commercial automotive. Production of commercial vehicles (including trucks and buses) has increased from 549,000 units in the financial year from April 2007 to March 2008 to 839,000 units in 2012/2013, Kline said. That represents a CAGR of 8.7 percent over the five years.

However, earlier optimism is being tempered by the latest figures for auto production says R. N. Ghosal, managing director of Tide Water Oil Co., which manufactures and markets the Veedol brand of lubricants in India. The auto market in India witnessed a significant slowdown in 2012 and 2013, and it is continuing this year as well. Published figures [for] 2012/2013 show a growth of only 1.2 percent in production and 2.5 percent in domestic sales of automobiles.

The 2013 report by the Society of Indian Automobile Manufacturers showed that over 18 million vehicles were sold in 2012/13, representing a growth of only 2 percent over 2011/12. The previous years growth was more than 11 percent.

Nevertheless, with rising income levels, Indias burgeoning middle class has been eager buyers of cars and two wheelers. According to the Society of Indian Automobile Manufacturers, production of passenger car vehicles almost doubled from 1.7 million units in 2007/2008 to 3.2 million units in 2012/2013. Kline said several automotive OEMs have established production bases in India, not just to tap the growing domestic market but for export markets as well.

However, Pars Oils Safdari cautions that the market is still relatively small. More than 60 percent of [the] vehicle population is two and three wheelers, [and] passenger car ownership per capita is a small compared to population.

Even with its bullish outlook, Kline acknowledges the state of the economy is curtailing sales. Almost all segments – consumer, commercial automotive and industrial – have been impacted by lower than expected GDP growth rate in 2013, said Phadke.

Different Standards

Undoubtedly, one of the major characteristics of the Indian market is the substantial difference in quality compared to both European and U.S. standards. According to Kline, the finished lubricant market has been using low- to mid-tier grades. And in the passenger car segment, most OEMs recommend SAE 5W-30 or 40 viscosity grades for engine oil. In the engine oil market for passenger cars, 15Ws and 20Ws still represent a major share, but there is a clear trend toward lower viscosity engine oils, said Phadke.

The move is being driven by OEMs seeking to conform to tightening emission and fuel economy norms. In the two-wheel market, 4T oils represent a major share despite the fact that two-wheel OEMs are increasingly proposing 10W-30 grade oils, and 20W-40 remains the norm. With the market penetration of automatic transmission vehicles still small, the introduction of automatic transmission versions of several popular cars is gradually changing the market for transmission oil, Kline said.

According to Tide Waters Ghosal, the 4T market is the fastest growing lubricant segment after heavy-duty diesel, which mostly uses API SG or above, despite the fact that API SG is obsolete and OEM specifications support API SJ.

Sixty percent of the passenger car market uses API SF, CC or CD grades, Ghosal added, which are also mostly obsolete in the U.S. According to API, CC is not suitable for use in diesel powered engines built after 1990, and CD was first introduced in the U.S. in the 1950s. It is a point echoed by Safdari. [The] market consists of API performance levels below SF and is price sensitive [with a] backlog in Euro emission standards sequences.

Kline said that in the commercial segment, API CF-4 and CH-4 have been the most widely used service categories, but there are efforts by OEMs to move toward CI-4 and CI-4 Plus. API 15W-40 is the major grade of engine oil used and [is] likely to remain so over the next ten years, [but] 10W-40 is being used in some high end trucks in the mining sector, Phadke added.

In the industrial sector, the market predominantly uses lubricants blended with conventional base stocks, mostly API Group I, although a few applications such as wind turbines, fire resistant hydraulic fluids, compressor oils and turbine oils require high-quality lubricants based on OEM recommendations. However, as equipment design becomes more complex and operating conditions more severe, there is likely to be a greater demand for high-quality lubricants in the industrial sector as well.

Indian emissions standards are known as Bharat, and the country as a whole reached Bharat Stage II by April 2005 and Stage III by April 2010 in the passenger car, light commercial vehicle, heavy-duty vehicle and two- and three-wheel segment. That equates to Euro 3 emission levels for gasoline and diesel emissions as well as carbon monoxide, hydrocarbons, nitrogen oxide and particulates. In 13 Indian cities, emission targets were raised to Bharat Stage III by April 2005 and Bharat Stage IV by April 2010, corresponding to Euro 4.

Competing with Locals

The lubricant market is dominated by national oil companies including Indian Oil Corp., Hindustan Petroleum and Bharat Petroleum. In addition, prominent private local companies have built a significant presence in the market, including Savita Oil, Tide Water, Apar and Raj Petro. Total, Castrol, Shell and ExxonMobil also are present, and analysts said that of the international companies, Castrol has assimilated best to the Indian business culture.

However, as an indication of the complexity in the market, Chevron pulled out in 2009. Shell also ended its joint venture with Bharat in 2007 to emerge as a stand-alone company. According to Mansi Tripathy, cluster marketing manager at Shell Lubricants, the oil giant saw a natural way to grow the lubricants business, saying, Recognizing the market opportunity, we took a strategic decision to build our own specific lubricants brands.

Indias national oil companies have an inherent advantage as a result of their in-house supplies of base stocks. This effectively safeguards them against swings in market prices and gaps in availability. Kline said that where government run enterprises buy lubricants, the supplier is often decided by the lowest quote. Because of their access to base stocks, nationals have a pricing edge.

They also have a strong retailing network that provides nationwide access to the market. However, Tide Waters Ghosal said market dynamics are changing. The retail market has tended to shift out of gas stations, which has created more of a level playing field.

According to Kline, the country has four base stock refineries – all run by national oil companies – with a total capacity of 1.1 million tons. Of this total, 54 percent is API Group I, and the remainder is Group II. There is no production in India of Group III/III+, Group IV or naphthenic base stocks, and the absence is met by imports.

India imports Group II/II+ base stocks from several countries, including South Korea and Singapore. Demand for Group III is small, but imports are growing. As the supply of Group III/III+ in the region increases, refiners in the Persian Gulf, including Adnocs upcoming Group III plant in Ruwais, United Arab Emirates, and the Bapco-Neste Group III plant in Bahrain, are well placed to meet rising demand in India.

A large part of the market still uses substandard quality lubricants. Safdari points to the prevalence of low-quality recycled engine oils and low-quality greases. The recycling of oil has become a nationwide phenomenon and is largely unregulated. T. R. Kumar, managing director of Tesla Lubricants in Dubai, said the proliferation of unlicensed operators is financially motivated. Only two operators are licensed by the government that can recycle oil, and the rest do not apply for a license to avoid paying tax, he said.

Safdari added that exporters are frequently asked by Indian importers to under-invoice the value of consignments so that the importer will pay less in import duties. According to analysts, there is a widespread problem of lubricant counterfeiting that remains an issue for international companies.

Uncertain Outlook

A steep decline in the value of the rupee against the U.S. dollar is likely to increase the pressure on some lubricant companies in India, said Tide Waters Ghosal. A slowdown in the automotive sector, coupled with restrictions in the mining industry and stalled infrastructure projects, have resulted in flat lubricant
demand over the last two years. Brand-led pricing supported by consumer and trade benefits have given reasonable rewards to the leading companies. Others who are more dependent on business-to-business and industrial markets have seen margins erode seriously following the fall of the rupee.

Despite this, Shell Lubricants thinks technology will provide a qualitative stimulus to the market going forward. The Indian market is fast moving toward semisynthetic and fully synthetic products. Factors such as evolution of emission regulations by the government and introduction of technologically superior vehicles and machinery have contributed to this change, Shells Tripathy told LubesnGreases.

Price and the use of low-grade or recycled products are nonetheless likely to cast a long shadow over the lubricants market for some time to come. Yet, Tripathy believes the lubricants market will become more clearly defined. International oil companies bring a history of premium branding, strong distribution and consumer affinity [while] national oil companies play on national sentiments to drive people to more locally relevant and affordable products.

India is perhaps a unique challenge, but as the worlds third largest lubricants market, it promises to be a powerful magnet for manufacturers and marketers alike.