The World Banks economic outlook on South Africa stated, South Africas growth is stuck in low gear, with real GDP growth estimated at 1.3 percent in 2015/16 and projected at 0.8 percent for 2016/17 due to a combination of domestic constraints and external headwinds, arising from the fall in commodity prices and slowdown of the Chinese economy. The weak growth performance has exacerbated already high unemployment, inequality and macro vulnerabilities. The weak economic outlook has made the fiscal outlook more challenging.

Market Overview

South Africa comprises nine provinces (Western Cape, Eastern Cape, Northern Cape, North West, Free State, Kwazulu Natal, Gauteng, Limpopo and Mpumalanga), each having its own peculiarities in terms of industrial, human and automotive indices. However, most of the lubricant market is concentrated in three provinces: Gauteng – South Africas commercial and industrial hub – Western Cape and Kwazulu Natal.

The size of the South African lubricant market is estimated at 400 million liters per year. It has one major refinery, Durban-based Sapref, that produces API Group I base oils. Sapref is South Africas largest crude oil refinery, with a capacity of 8.5 million tons per year. It is a joint venture between Shell SA Refining and BP Southern Africa,

Even though Sapref is the only Group I base oil producer in South Africa, there are no supply shortages. The base oil produced at Sapref is largely for captive use by the refinery owners, and the balance of South Africas Group I demand is met by either imported bulk shipments or local traders, said Paul Deppe, managing director for Fuchs Lubricants South Africa.

According to a Kline & Co. 2015 report, industrial lubricants constitute the largest proportion of the lubricant demand in South Africa, at 45 percent of the total, while demand for commercial vehicle lubricants is estimated at 32 percent and that for passenger car lubricants is 23 percent. Several major players are active in the South African lubricant market, including Shell, BP, Chevron, Total and Engen.

According to Deppe, the mining industry remains the single biggest driver of lubricant consumption in South Africa. He noted that despite the current global downturn in the resources sector, mining is still the single biggest end-user for the entire spectrum of lubricants.

In the gold mining sector specifically, the ore bodies are at extreme depths (up to 4 kilometers), which means that mining those deposits is no longer economically viable using traditional techniques. As a result, some mining companies are looking to increased mechanization to increase productivity and costs, which should also see increased consumption of lubricants, said Deppe.

He added that a large percentage of local business is tied to the mining industry such as heavy and light engineering companies and transport. Much of the current work on open-cast mines is now undertaken by private contractors, who supply all of the heavy equipment required, which also consume large quantities of lubricants, said Deppe.

Market Trends

Deppe disclosed that the demand for synthetic lubes is on the rise in all segments of South Africas lubricant market, with specific emphasis on the automotive sector. The demand, he noted, is driven largely by both passenger car motor oils and heavy-duty engine oils. However, he added that a large portion of the market remains extremely price sensitive when it comes to lubricants. Many consumers are largely ignorant of the necessity of using higher quality products and the consequences of using cheap, low quality alternatives. A large part of a lubricant suppliers job is educating the customer, rather than merely selling.

On the other hand, Deppe said that demand for lithium-based greases is on the rise: Lithium hydroxide is now becoming a scarce commodity. The demand for lithium batteries has also increased, and this has resulted in global shortages. If this trend continues, then the demand and focus will shift to calcium and calcium sulfonate greases, which require different manufacturing processes.

Group II Demand Increasing Steadily

Deppe noted that there is a shift from Group I to Group II base oils in South Africa. He projected that demand would continue to grow in 2017.

Demand for Group II base oils in South Africa is definitely rising, and we do see more and more lubricant manufacturers making the change from Group I to Group II. Group II base oil supply is also more stable than Group I, and supply hubs have been set up in Durban, which means that product is readily available, said Deppe.

Prior to 2015, South Africa was predominantly a Group I market, with some demand for Group III and naphthenics. Today, Group II base oils from one major producer, in particular, have displaced a large volume of Group I demand, and this trend will continue into 2016 and 2017, he projected.

However, Deppe could not attribute the growth in Group II base oil demand to price alone because, in his view, it would be extremely difficult to ascertain whether Group I or Group II is more competitive for the entire industry. It would depend on the buying power of the manufacturer, its ability to source bulk shipments and the effect of the rand/dollar exchange rate at the time of purchase. It could be misleading to make a direct price comparison between Group I and Group II base oils. Rather, we should compare the costs of Group I and Group II formulations because the treat rates differ, Deppe said.

On the other hand, he noted that current trends suggest that naphthenic blends will replace some paraffinic blends: The closures of Group I base oil plants across the world will, in time, create an imbalance in Group I global supply. The emergence of Group II base oils and gas-to-liquid technology has already displaced a large volume of Group I from certain applications. He speculated that cross-blends of naphthenic and Group II base oils will replace the dwindling supply of Group I oils.

Deppe related that a number of global naphthenic suppliers are already playing an active role in the Group I replacement market, and they already have bright stock equivalents available in the marketplace. He acknowledged that it is a challenge to provide accurate statistics on the volumes of naphthenics being used because of the diversity of its applications, but he estimated that naphthenics comprise about 7 to 9 percent of the base oil market in South Africa.

Forecasting future trends for the South African lubricant market, Deppe said original equipment manufacturer requirements and technological advancements in engine designs are the primary drivers in the market. These factors will require lubricant manufacturers to continually improve the quality of their products to meet the demands of vehicle manufacturers.