India has been on a fast growth track over the past decade. The rapid growth of the Indian economy has increased the interest of foreign investors in the Indian market, making it one of the most favored destinations for foreign direct investments. However, during 2012 and 2013, a mix of factors – the uncertain global economic environment, stalled reforms in India, a widening current account deficit and a depreciating currency, among others – have put the brakes on the Indian economy.
In 2012 and 2013, total gross domestic product growth was about 5 percent per year, which is half the peak growth rate of 10 percent registered in the prerecession years. The decline in GDP growth has been one of the primary reasons for the decline in finished lubricant consumption in the country – something that has not happened in a very long time.
Per a recently completed study by Kline & Co., finished lubricant demand in India is estimated at 2.275 million tons in 2013. This makes India the third largest finished lubricant market in the world, after the United States and China. Industrial lubricants, including process oils, account for 54 percent of the demand, while the balance is consumed by automotive lubricants, both consumer and commercial.
The Indian finished lubricant market is very competitive and is characterized by the presence of several categories of lubricant marketers. Nationalized oil companies (NOCs) include Indian Oil Corp. (IOCL), Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL). Global majors comprise Shell, ExxonMobil and BP Castrol. Other international companies in the market are Total, Valvoline, ENI, Petronas, Fuchs, Kluber, Idemitsu, Gulf Oil and GS Caltex, among others. Finally, domestic independents are Apar, Raj Petro, Columbia and Savita, among others.
In 2013, IOCL, HPCL and BPCL occupied the top spots in terms of lubricant sales volume. These NOCs are backwardly integrated, with in-house supply of base stocks available to them – an advantage that no other company in India enjoys. Domestic independents, such as Apar and Raj Petro, are strong in the domestic process oil market and are now increasing their presence in export markets. Among the global and international suppliers, BP through its Castrol brand and Shell are well-established at the top end of the market.
Consumer Automotive Lubricants
The consumer automotive lubricants segment, which includes lubricants consumed by private-use cars and two wheelers, is the smallest, but it is also the most dynamic of all three segments. In India, two-wheelers are an important means of conveyance, accounting for almost 84 percent of the total passenger vehicle population in 2013. This makes motorcycle oils a key product category. Passenger car motor oil represents less than one-third of consumer automotive lubricant demand.
The consumer automotive lubricant market in India is witnessing significant quality upgrades. India is slowly, but steadily, enforcing stricter emission limits and fuel efficiency norms. This has catalyzed a shift toward the use of lighter viscosity engine oils in passenger cars. Currently, most of the mainstream car original equipment manufacturers, including Maruti Suzuki, Volkswagen, Skoda and Ford, recommend light fuel-economy grades, such as 5W-30 and 5W-40, for their newest models. Driven by such OEM recommendations, Indian passenger car motor oil demand is shifting from heavier grades, such as 15W-40 and 20W-50, to lighter grade engine oils. However, heavier grades still represent a major portion of the passenger car demand in India.
In the motor cycle oil category, 20W-40/50 remains the mainstream viscosity grade. Hero MotoCorp, along with a few other OEMs, has started recommending 10W-30 for their newer two-wheeler models.
Automatic transmission cars have had a lower acceptance among consumers in the past due to their higher cost and fuel economy concerns. However, this is changing rapidly in India. Currently, almost all the top-end car OEMs offer automatic transmission variants for most of their models.
A few OEMs, such as Maruti Suzuki, have started experimenting with automatic transmission cars in the compact car segment, which has met with encouraging success so far. It is expected that the growth rate of automatic transmission cars will surpass that of manual transmission cars, making automatic transmission fluid one of the fastest growing product categories in the consumer automotive lubricant market.
The recent Kline study also establishes that the installer segment, which includes auto dealerships, franchised and independent workshops and garages, accounts for more than four-fifths of the total consumer lubricant market. Fuel retail stations sell two-cycle oils premixed with fuel, which are used by two-wheelers. The demand for two-cycle oils is declining in favor of four-cycle oils.
Synthetic lubricants, although currently with a low penetration, are gaining wider acceptance among consumers, especially in the passenger car market. OEM recommendations, longer engine life and better fuel economy are some of the factors leading to the growth of synthetic lubricants. In the motorcycle market, semisynthetic products represent almost one-fourth of consumption, but the penetration of full-synthetic products is still very low because it is restricted only to the top end two-wheelers in India.
Commercial Automotive Lubricants
Commercial automotive lubricants accounted for about one-third of the total finished lubricant market in 2013. This segment was the hardest hit by the economic slowdown. The on-highway segment contracted due to an unfavorable freight market. At the same time, some off-highway segments – mining and construction – continue to show low or negative growth. This resulted in a lackluster performance in the commercial automotive lubricant segment in India in 2013.
Heavy duty motor oil is the main product category used in the commercial segment. The market predominantly uses 15W-40 and 20W-40 grades. There is still some demand for monograde engine oils because older vehicles still use these grades. However, this is changing in favor of 15W-40 as most OEMs recommend it now.
There is very limited movement toward 10W-30 grades, in the absence of any OEM focus, as well as concerns about engine oil durability when using these grades. In India, use of compressed natural gas-driven vehicles is increasing because the government mandates the use of CNG in select cities and regions.
Gear oil and hydraulic transmission fluid are other important product categories in the commercial segment. Most off-highway equipment has hydraulic systems that create significant demand for hydraulic transmission fluids.
Overall, the penetration of synthetics in the commercial segment is negligible. Since the market is skewed predominantly toward 15W-40 and 20W-40 grades for engine oils, there is no major role for synthetics at these viscosity grades.
Industrial Lubricants
India is a large market for process oils, which account for 53 percent of overall industrial lubricant demand. Rapid expansion of the power generation and distribution infrastructure has created a strong demand for transformer oils in India. Other process oils, such as white oil and rubber process oil, contribute significantly to the total industrial oil demand in India. Industrial engine oils – including marine and railroad – metalworking fluids and hydraulic fluids are other important product categories.
In terms of end-use sectors, power and chemicals, including rubber, are the two largest. High use of process oils in both these segments makes them the biggest end-use segments. Other key end-users include metals, auto/auto-component/general engineering, marine and railways.
Penetration of synthetic lubricants in the Indian industrial segment is limited. The demand is largely met by conventional lubricants blended with API Group I base stock. There is some demand for synthetics in metalworking applications and in niche sectors such as wind energy. The Indian market is extremely price-sensitive, which restricts the demand for synthetic lubricants. However, there has been a trend toward better maintenance practices by some key end users.
The demand from sectors such as mining and metal has remained subdued as new projects in these two sectors have dried up. These sectors are grappling with policy related issues, and some of the coal mining blocks awarded in the past have been cancelled. This situation may be resolved now that a new government has been formed.
Outlook
It has been observed that the demand growth for finished lubricants is loosely dependent on the overall GDP growth of the country. Growth will also depend on developments in the domestic and international business environment. A stable government will improve investor confidence. A few policy related roadblocks in sectors such as mining are expected to be addressed that will induce some growth in the economy. It is expected that overall industrial growth will register a mild to modest growth over the next five years.
The growth of the commercial sector is strongly linked to overall growth in the industrial segment. Lower industrial activity would translate to an unfavorable freight market, and lack of growth in the construction and mining segments will dampen the growth in demand for off-highway commercial lubricants. As industrial activity picks up in the coming years, the demand for commercial lubricants is expected to rebound.
The market for passenger vehicles was flat in 2013, having been negatively affected by tightening credit and rising fuel prices. However, it is expected that sales of passenger cars, and especially two-wheelers, will register a strong growth in the coming years. This will drive growth in the total demand for consumer automotive lubricants.
Kline forecasts that the total demand for finished lubricants in India will grow at a compound annual growth rate of 2.5 percent from 2013 to 2018. Demand for consumer automotive lubricant will grow the fastest at a compound annual growth rate of 6.6 percent over the same period.
Conclusion
Despite the slow growth in the Indian finished lubricant market in the last two years, the country remains an attractive one for lubricant marketers. The share of quality lubricants is small, at just 20 percent of the total market, but it is growing fast. The shift toward stricter emission norms and better fuel economy will entail the use of better quality lubricants. The trend toward better quality engine oils in passenger cars is apparent and is expected to trickle down to the other product segments.
Further, the market is becoming more challenging with the entry of new international and domestic lubricant suppliers. Established suppliers will have to work hard to retain their market shares.
The growth rate of 2.5 percent is low compared to the growth rates witnessed in prerecession years, but the market outlook is more attractive for high-quality lubricants. Going forward, the opportunities and challenges in the Indian lubricant market will be quite different from those experienced in the past.