Despite this optimism, it is possible the lubricants business will not see a radical change overnight, and gravitation to better quality higher specification products may be a slow process. According to the International Monetary Fund, the fall in commodity prices, most notably oil, is taking its toll on many economies. In 2016, growth in the region will fall to 1.5 percent, the lowest in 20 years, but is expected to increase to 3 percent in 2017.

Even so, the fund paints a picture of two Africas. Some countries such as Cte dIvoire, Ethiopia, Kenya, and Senegal are forecast to continue to grow at more than 6 percent. On the other hand, commodity exporters are under severe economic strains and include the regions three largest countries Angola, Nigeria and South Africa, which are expected to grow just 1.5 percent this year.

Total, the French refiner and marketer, has been doing business in Africa for almost 100 years, and according to Thibault Lesueur, head of marketing specialties, at Totals Africa and Middle East Division, the continent offers unique challenges. No other continent has faced so many changes at the same time – in the last 35 years the population has doubled.

One of the everyday challenges is energy infrastructure. In rural areas, 90 percent of the population has no access to electricity, and this is a key driver to take into consideration. Despite the apparent homogeneity, its sheer size necessitates recognition of the differences between the 53 countries and 1.2 billion population that comprise the African continent.

Diverse Lubricants Market

The lubricant market is equally disparate said Lesueur. Africa accounts for 5 percent of the worldwide lubricant market, according to estimates by IHS – or approximately 2 million tons in 2015.

In the Maghreb – the countries in Northwest Africa – specifications are closely aligned to European standards and often are higher than their southern counterparts. Even so, three markets – Egypt, Nigeria and South Africa – are the major lubricant consumers, with other smaller markets typically using low tier products similar to API SF-SJ and CD-CF.

Speaking in October at the ICIS Middle Eastern Base Oils and Lubricants Conference in Dubai, Lesueur said irrespective of qualitative issues, Africa is still expected to grow. Totals internal estimates predict Gross Domestic Product to grow by 4 to 5 percent per year by 2020 but will vary from market to market.

Algeria is also an important market because of its oil and gas sector, but the overall market remains small. The car parc is only 50 million vehicles, but is expected to grow. Lesueur said some automakers are betting on a substantial increase in the middle class to spur new auto purchases, but he cautioned it may be a slow process.

It could be [up to] 10 million cars per year. But this will not be tomorrow and it is an idea of what Africa could be in 25 years. Political risk also casts a long shadow over doing business, as do frequent economic upheavals. Nigeria is a recent example with significant falls in the value of the naira following the collapse in oil prices and ongoing concerns about corruption. Ninety percent of countries in Africa are considered corrupt or highly corrupt said Lesueur, citing the 2015 Corruption Perceptions Index.

Egypt and South Africa account for around 300,000 metric tons per year. And although Nigeria is a sizeable market, its intrinsic complexity and unpredictability render it a unique challenge. Nothing is like Nigeria, but in 10 or 20 years, it could be similar in volumes to Egypt and South Africa. But with Nigeria we never know. Despite the risks, Lesueur said Nigeria could witness a doubling of its population in the next 20 to 30 years.

In most African countries, high fuel sulfur content impacts the total base number needed in a lubricant. And for all the discussion of Africas potential large market, 15 to 20 percent is inaccessible, according to Lesueur. There are a lot of parallel imports and counterfeiting, as well as a lot of low standard products, even if the market is expecting to see a lot of new cars.

Refiners Facing Squeeze

As the market expands, local producers are finding it difficult to adapt to more restrictive specifications, and the gap in expertise is being met by imports of refined and petroleum products as demand increases. Local production will not meet the local demand, and it will be harder with new specifications, he adds.

The new specification, which dictates a sulfur content of 50 parts per million, cannot be supplied from local refineries, and whose owners have been reluctant to invest in new technology, and some local refineries will close, said Lesueur. This is part of a global pattern. The investment is so big, and the market is suffering from imports. This will have an impact on base oils. Nevertheless, some countries have already begun using the 50-ppm standard, with the expectation that the pace of conversion will quicken and put pressure on local refiners who lack technical and operational skills.

Africa is predominately an API Group I base oils market, but it faces an uncertain future, with little expectation that plants will be upgraded or that any new base oil plants will be commissioned. Egypt and South Africa are sources of Group I base oils, but are not sufficient to meet demand.

Group II and III base oils are imported from the U.S., Asia and other major base oil markets. Some markets find it cheaper to import than source from local refiners because of preferential trade agreements that reduce import costs. According to Lesueur, the level of imports has grown from around 15 percent of demand in 2005 to around 45 percent last year.

Totals lengthy presence in Africa provides both a unique perspective and a strong business footprint that rivals will find difficult to match. It is the leading marketer of finished lubricants and has equity in five refineries, including a 44 percent stake in Sogara (Gabon), 19.7 percent in Sonara (Cameroon), 20 percent in SAR (Senegal), 25 percent in SIR (Cote dIvoire) and 36.4 percent in Natref (South Africa).

Total operates 5,030 service stations in Africa and the Middle East and employs 7,250 people. It also operates five lubricant blending plants and has equity participation in 15 others; 143 depots provide a logistics backbone. By virtue of its own experience, Total has firsthand knowledge of the challenges facing Africa, particularly when it comes to energy.

Global Economy Casts Long Shadow

Africas economic performance correlates to the international economic environment, which is
less supportive than it has been for many years. Of concern is the strong possibility that logistic costs will comprise an increasing part of base oil costs, and the continents heavy reliance on imports leave it particularly exposed.

Yet, according to an industry observer, the shipping industry is in a state of crisis. Caroline Huot, an international maritime expert, told delegates in Dubai that more than 90 percent of raw materials or finished goods are carried by sea, and the quagmire facing the industry reflects global economic activity. It is interesting to see what the future has in store for base oils and finished lubricants in general.

Nowhere is shippings predicament more apparent than in the upheaval faced in the container shipping industry. A rush to consolidation has quickly morphed into a state of siege following the collapse of industry behemoth Hanjin. The container business was reasonably profitable until mid-2015, but more mega box ships came on the scene and changed the profitability of the market.

The surge in deliveries of ultralarge container ships, capable of carrying up to 20,000 TEUs, has devastated the sector and created a huge imbalance between supply and demand. Huot said that as of July 2016, around 206 ships were sitting idle, and losses are piling up.

The story is similar in the dry bulk market, which is besieged by significant oversupply and according to Huot was artificially propped-up by the Chinese market. We have seen an increased number of bankruptcies in dry bulk, and the book impairment is counted in millions. Perhaps unsurprisingly, the fall in the Baltic Dry Index, the main indicator assessing the price of moving major raw materials by sea, coincides with a rise in the number of bankruptcies.

The correlation is equally analogous with vessel new building prices, said Huot. With sentiment generally pessimistic, bankers have largely exited from financing, but every cloud has a silver lining. As scrapping increases, there will be a pick-up in rates. We hope to see a balanced market, probably in 2018.

Perhaps the least gloomy picture in the industry is the tanker market for several reasons. Huot said the tanker market is the only one to benefit from the fall in oil prices. Low prices increased demand for floating storage, and the U.S.-led shale boom has also increased demand for tankers.

New refining capacity in the Middle East is also likely to boost demand. Irans return to international markets is expected to spur orders for new builds. The National Iranian Tanker Co. boasts a fleet of 62 tankers, about one-half of which need modernization.

Africa Holds Promise

On paper, Africas demographics look compelling, especially when factored in the growing middle class. Yet, Africas latent fragmentation makes it impossible to view the continent as a homogeneous market, and gaining critical mass outside the big three markets remains a challenge. Whats more, despite political efforts to improve standards of governance and reduce high levels of corruption, both issues remain core to the challenges of doing business.

Companies can minimize risk by focusing on selective markets that exhibit certain key facets such as middle class growth or expectations for overall economic growth. Africas significant agricultural sector is also not to be overlooked in terms of lubricant demand.