The report went on to speculate that the countrys deficit is expected to decline to 11.3 percent of GDP in 2016, and decline further in the medium term, with a continued fiscal consolidation effort. Egypts external accounts are likely to worsen before recovering afterward, provided that monetary authorities continue to ease restrictions on foreign exchange and realign the exchange rate.

Egypts Lubricant Market

Egypt has nine refineries, with eight being operated by the states Egyptian General Petroleum Corp. (EGPC). The exception is the privately owned Middle East Oil Refinery (Midor) in Alexandria. Egypt is estimated to account for Africas second largest domestically produced oil refining capacity.

Similarly, Egypt is one of only a few countries in Africa that produces base oils locally. The refineries include Alexandria Petroleum Co., Amreya Petroleum Refining Co., Alexandria Mineral Oils Co. and Suez Oil Processing Co.

Rami Al Kinanny, general manager of Cairo-based Hitech Oils and Grease, said that ExxonMobil is the market leader in Egypt, followed by other multinationals such as Total, Misr Petroleum Co., Cooperation Petroleum Co. and Shell, among others. He also reported that ExxonMobil, Shell, Cooperation Petroleum and Misr control more than 75 percent of the market.

According to its website, Misr is one of Egypts largest petroleum products marketing companies. It commenced business in 1911 as Shell Egypt Ltd. but was nationalized as an Egyptian company in 1964. The company distributes its products through a large number of sales outlets and services all of the countrys governorates, which are the top tier of Egypts five-tier jurisdictional hierarchy.

Cooperation Petroleum was established in 1934 and is a subsidiary of the Egyptian General Petroleum Corp. (EGPC) According to its website, it is the largest integrated company for the production and marketing of oil in Egypt.

Kinanny added that Shell, Emirates, Oil Libya and Taqa Arabia are facing competition from suppliers that market low-performance rebranded products from the United Arab Emirates. Taqa Arabia is Egypts first privately owned petroleum marketing company and holds an exclusive contract as the sole distributor of Castrol products in Egypt.

Kinanny said independents do not have a noticeable presence in Egypts lubricant market. None of the independents … is recognized by the EGPC; hence they have limited growth and profitability. He noted that this measure by the EGPC is aimed at preventing subsidized fuel and energy products such as diesel, spirits and solvents from being smuggled out of Egypt.

Market Trends

Egypts lubricant market is dominated by API Group I base oils produced locally at the Alexandria Mineral Oil Co. and supplemented by imports from Iran and the UAE with a few imports from Europe, said Kinanny. While Tayeb concurred, he noted that Group II base oils are beginning to enjoy market presence through multinational companies operating in Egypt, especially in engine oil applications.

He emphasized that the EU-Egypt Association Agreement established free trade arrangements for industrial goods and concessionary arrangements for trade in agricultural products. The agreement opens the prospect for greater liberalization of trade in services and farm goods. Even though the agreement grants priority to European suppliers due to tax advantages, small shipments of base oils are imported from Russia through Latvia and Jebel Ali port in the UAE.

Kinanny noted that synthetics are beginning to gain traction in the market because a lot of higher end cars are more noticeable nowadays. These upper-end vehicles are owned by around 5 percent of the population. However, the majority of consumers are still [using] Group I oils because of price and because old engines, especially in trucks, require frequent oil additions.

Kinannys view was corroborated by Kline & Co.s 2015 view on Egypts lubricant market that stated, Pricing has caused the consumer segment to have a similar dependency on conventional oil; albeit, smaller in volume. The Kline report, however, noted that demand for both conventional oil and synthetics are expected to have a compound annual growth rate of 1 to 3 percent, and that the shift to synthetics will be more prevalent in the consumer segment.

The modernizing vehicle parc, government regulations and initiatives such as the Clean Technology Fund, which seeks to modernize public transport in an effort to reduce carbon emissions, will also boost demand for synthetics in Egypt, the Kline report noted. Kinanny added that more than one-half of the vehicles in Egypt are run by diesel, stressing that monogrades dominate Egypts lubricant market because many consumers have the perception that monogrades work better in hot environments.

Challenges

Egypts lubricant market, like many others in Africa, is confronted by the challenges of substandard lubes and counterfeiting. Substandard products are flooding in from the UAE because there are lots of loopholes in customs regulations that allow huge amounts of substandard lubes in and out of the country, adversely impacting local investors and consumers, said Kinanny.

He added, Multinational brands are counterfeited daily due to the huge profit margin gained and lack of regulation and law enforcement. Kinanny noted that one thing fueling counterfeiting is a high level of ignorance and lack of knowledge among dealers and consumers, specifically in the automotive segment.

It is very common in some markets for businesses to educate consumers and agents; yet, in such tough economic times, this task becomes much more difficult, he said. In addition, Kinanny contended that Egyptian consumers are beset by a serious shortage of hard currency and daily fluctuations in currency values and availability. Tayeb added that in addition to low-quality lubricants, another major challenge confronting the market is the short supply of raw materials such as base oils and additives to blend lubricants.

Tariffs are not an issue because Egypts lubricant market operates in a flat tariff regime for both imported lubricants and additives, in which all imports are subject to the same tariff. Certain trade agreements resulted in some exemptions from customs duties such as the Common Market for Eastern and Southern Africa and the Arab League in addition to Europe. Yet, a 10 percent sales tax is applied to both lubricating oils and additives, Kinanny noted. Tayeb concurred, adding that all petroleum products are subject to an international tariff that adds a sales tax of 10 percent on both synthetic and mineral oil products.

Five-Year Projections

Kinanny said Egypts population, estimated at more than 90 million, remains an advantage. This advantage is bolstered by Egypts position as a transit point for goods heading to Libya, Sudan and Gaza. Egyptians should turn these transit points into production points and get the wheels going, he said.

According to Kinanny, the EGPC has also been targeting renewable energy in response to Egypts prevailing economic realities. The organization is encouraging registered rerefineries to produce quality rerefined base oils in order to avoid imports and try to help save the dwindling Egyptian foreign currency reserves, he noted. Africa is growing faster than many other locations worldwide. Egypt is African, and I believe business among African nations will witness a huge jump in the next five years.

Finally, Tayeb speculated that in the next five years, major oil corporations will no longer dominate Egypts lubricant market, with the exception of the public sector company, Misr. He expects to see tangible growth in the Egyptian economy and in industry that will increase lube demand in the country.