Julys coup attempt against President Recep Tayyip Erdogan was a potent reminder of instability in one of the regions most important lubricant markets. At a time when the oil exporting Gulf States are witnessing a period of austerity, Turkeys heavily industrialized economy is a rare bright spot for refiners and lubricant marketers. In contrast to the wider base oils and finished lubricants market, Turkeys economy has been boosted by the fall in crude prices and, together with the governments decision to increase the minimum wage by 30 percent, has ensured domestic demand remains highly resilient.
Yet, the recent surge in terrorist attacks and a huge influx of immigrants fleeing war in neighboring Syria is testing the limits of stability. It is no surprise that optimism in the lubricants industry is tempered by the possibility of a sudden shock to the U.S. $735 billion economy. Inflation in Turkey remains stubbornly high, posing a threat to corporate profits if left unchecked by government. The International Monetary Fund estimates inflation in the 12-month period average to reach 9.8 percent this year, falling to 8.8 percent next year – exceeding the central banks target by a wide margin.
Demand Outpaces Region
With lubricant demand around 650,000 metric tons per year, the Turkish market dwarfs other regional markets, including Egypt (441,000 tons) and Saudi Arabia (400,000 tons) both of which have been the focus of recent attention for their potential. Turkey is ranked among the top twenty global lubricant markets, and the diversity of the lubricant sector interests lubricant companies.
The IMF expects growth of around 4 percent this year, and Turkeys large population is expected to continue to drive consumer demand, particularly in the automotive sector. Turkeys population of 78 million, 20 million vehicles and its industry has remarkable lubricant consumption, said Seluk Akat, general manager of Istanbul-based Adco. But Turkey also has good export capability and is the main point for lubricant export. Despite a flourishing local blending market, Akat said that nearly 100,000 tons is imported yearly into Turkey.
Adco, founded in 1977, is an additive supplier and distributor of specialty chemicals to the petroleum industry. It estimates 84 percent of the lubricant market is supplied by local refiners and the balance imported. Akat claimed that automotive lubricants are the largest segment at 48 percent of total lubricant consumption, followed by the industrial market at 41 percent. Marine at 7 percent and grease at 4 percent account for the rest of the market.
According to Akat, Turkey ranks fifteenth in world motor vehicle production. Domestic vehicle production increased 16 percent last year to 1.359 units. It is also a major base oil producer. After Iran, Turkey has the largest base oil capacity and is the worlds eighteenth largest economy, although Irans rapid return to oil markets is having an increasingly disruptive effect on base oil prices, particularly API Group I. Even so, Turkey remains a net importer of base oils, said Akat.
Buoyancy in Turkeys consumer market is exemplified by soaring car sales, which increased almost 24 percent in 2015. Light commercial vehicle sales also grew by more than 34 percent.
Turkey is a vehicle production powerhouse. Akat cited data that ranks Turkey first in the European Union for bus production, second for heavy vehicle production and sixth overall in production output. Unsurprisingly, commercial vehicle lubricants account for the largest market share in Turkey almost double the size of the passenger car market.
The countrys highly diversified industrial base is a major contributor to the economy, and its multifaceted composition has produced a burgeoning market in industrial lubricants. There are 13 original equipment manufacturers in Turkey producing more than 1 million vehicles a year, Akat said, including global names such as Daimler, Fiat, Ford, Honda, Hyundai, MAN, Renault and Toyota.
Interestingly, by fuel type, 40 percent of the market is LPG (Liquid Propane Gas), 32 percent diesel and 28 percent gasoline. The high share of LPG has been reflected in a gradual drop in base oil imports, which fell to 591, 346 tons at the end of 2014. Turkey has attracted global lubricant suppliers, and rapidly evolving OEM technical demands and ever stringent emission standards could see growth in synthetic and semi-synthetic lubricants – a trend that is mirrored globally.
The lubricant market is dominated by Shell and Turkeys OMV Petrol Ofisi, according to Adco, with 20 percent and 18 percent share respectively. The rest of the market comprises BP (17 percent), Total (10 percent), Opet Fuchs (9 percent), ExxonMobil (9 percent), Belgin (5 percent), Lukoil (3 percent), Alpet (2 percent) and M Oil (1 percent), with the balance claimed by a number of small brands.
Shell has operated a joint venture with local Turkish company Turcas since 2005 for the sales, marketing and distribution of lubricants – Turcas holds a 30 percent interest in the venture. The Shell-Turcas Petrol JV claimed a 25 percent market share at the end of 2015, citing estimates by the Energy Market Regulatory Authority.
However, Petrol Ofisi claims data collected by the Petroleum Industry Association between the years 2010 and 2015 assesses its market share at 25.3 percent. Its lubricant and grease production plant in Derince-Kocaeli has a yearly production capacity of 140,000 tons, and that has helped it develop a strong distribution network through its chain of filling stations and oil change centers.
Turkey is also a significant exporter of base oils, lubricants and additives. Adco, citing as sources T ik, T pras, PwC, said Turkey exported 3,264 tons of base oils, 165,457 tons of lubricants and 4,979 tons of additives/chemicals in 2014. Shell-Turcas claims it exports to 55 countries from its lubricant and grease production plant, amounting to 19,771 tons in 2015 – an all-time high. However, Turkeys reputation as a major energy-trade route and the ability of major oil companies to continue uninterrupted exports was called into question after authorities closed down Istanbuls strategic Bosporus Strait to oil shipping tankers in July.
BPs downstream business, which includes lubricants, dates back to the 1940s, the Castrol brand to 1953. BP considers Turkey to be among the top 10 markets for BPs global lubricants business, and its plant located at Gemlik celebrated its fiftieth anniversary last year. Lubricants produced at the plant are exported to 11 countries. BP claims data collected by the Petroleum Industry Association assesses BPs market share at 22 percent for automotive lubricants and 25 percent for engine oils.
Regulatory & Political Uncertainty
In contrast with many other markets, Turkeys lubricant sector is overseen by multiple agencies, including the Ministry of Customs and Trade, Turkish Standards Institute, Petroleum Industry Association (with claims to represent 68 percent of the lubricants sector), Revenue Administration, Energy Market Regulatory Authority and the Association for Mineral Oil and Petroleum Products Industry. Akat claimed actions by some regulators have hampered the lubricants sector, and a bureaucratic customs authority is putting a brake on trade.
Emission regulations are being increasingly harmonized with EU standards, although implementation dates are likely to vary. Price controls have also been imposed on gasoline and diesel products, but a flourishing trade in the black market is undermining stability in the market, according to Akat. Turkey, like other regional lubricant markets such as the United Arab Emirates and Saudi Arabia, is grappling with a rise in counterfeit products, although the countrys top-heavy regulatory structure should go some way to minimizing the incidence.
Turkeys fluid political situation adds further complexity to doing business, and risk has unquestionably heightened during the administration of President Erdogan. Still, sanctions imposed on Turkey by Russia after the downing of a Russian jet could be eased soon say analysts, and relations between Turkey and Israel have improved recently.
Nevertheless, companies face the combined impact of recent political upheaval, a sagging currency and rampant inflation. These factors will inevitably squeeze profits at a time when global refining profits are under pressure due to sluggish demand.
In the run-up to the thwarted coup, Turkeys economic salvation was booming consumer demand. However, following the three-month state of emergency, it seems improbable that the economy will not emerge undamaged. Local lubricant blenders and U.S. companies and affiliates may also suffer from deteriorating relations between Washington and Ankara. New base oil production from the UAE and Saudi Arabia also threatens to disproportionately distort regional supply and demand, with Turkey looking particularly exposed if political instability continues for a significant period of time.
In a region beset by turmoil, Turkey still holds promise as a long-term large lubricant market. But uncertainty over the duration of the upheaval will inevitably prompt a review of investment plans and strategy. Short-term operational factors also must be weighed in ensuring that the likelihood of disruption to business is reduced as much as possible. The trouble for the base oils and lubricants business is the possibility that the government could play fast and loose with the countrys location as an oil export hub.