? Following the governments 1978 reforms, Chinas economy has maintained rapid growth. The average GDP growth rate since 2000 is 8.4 percent, and 8 percent growth is predicted for 2005.

The automotive industry is a prime example of Chinas industrial development and growing domestic consumption. In 2004, a total of 5.07 million vehicles were produced, breaking the 5 million mark two years earlier than predicted.

Total 2004 sales of heavy-duty vehicles reached 1.52 million, up 26 percent from 2003. Commercial vehicle sales totaled 1.21 million, up 5 percent; and passenger car sales totaled 2.32 million, up 15 percent.

This rapid development in the automotive industry as well as in steel, power, infrastructure construction and other industries, has spurred a huge demand for lubricants. China is now second only to the United States in lubricant consumption, with demand reaching 4.64 million metric tons in 2004.

Automotive lubricant demand accounts for 54 percent of the total; industrial lube demand for 29 percent; and process oils and other specialty lubes for the remaining 17 percent. This is similar to average world consumption.

Lube Industry Structure

The major players in the Chinese lubricant market fall into three categories. One includes familiar multinational companies such as Shell, ExxonMobil and BP. Chinas huge market has caught the interest of nearly all of the global oil producers.

Second is Chinas two state-owned petroleum companies, Sinopec (China Petroleum & Chemical Corp.) and PetroChina (China National Petroleum Corp., or CNPC). The third group is the middle- to small-size domestic lubricant enterprises.

Multinational companies entered China to supply exclusive services to multinational automakers. Although their share of Chinas lubricant market is around 20 percent, they have more than 60 percent of the high-end market, where profits are much higher than in the middle and low-end oil markets.

The increasing popularity of cars and upgrades in auto technology have greatly expanded the size of the high-end lube market. Insiders estimate that high-end oils will eventually constitute 50 percent of the total automobile oil market.

Because of unbalanced development in China, there are significant regional differences in lube consumption volumes and grades. In the more developed east and south, the major lubricant categories for passenger cars are API SJ and SL on the gasoline side, and CF-4 or above on the diesel side. In relatively backward regions such as the northwest and southwest, API SE and CD are the dominant engine oil grades. Discrepancies in economic development and lube selection are likely to exist for a long time.

Base Stock Demand

China now has 21 base oil manufacturing plants, with total production capacity of over 4 million metric tons annually. Most of the output is high or medium viscosity index, although some products are below the quality of API Group I oils.

PetroChina and Sinopec are using hydroprocessing technology in plants in Lanzhou, Daqing, Kelamayi and Shanghai, with total capacity of nearly 1 million tons annually. Daqing and Shanghai are licensing Chevrons Isodewaxing technology to produce API Group II and III base oils.

API Group I base oils are the type in greatest demand in China. High-grade base stocks still need to be imported, and import volumes are increasing. Import volumes of bright stocks and synthetic oils are also increasing.

Base stocks are in short supply in China and some Asian lube markets, with most lube blenders importing base oils from Korea, Singapore, Thailand, Russia or elsewhere. With the huge demand for base oil and the high price of crude, and with some base oil refineries facing maintenance shut-downs this summer and autumn, the price of mid-and high-grade base stocks will rise constantly, and more base oils will need to be imported from overseas.

Additives Needed

Chinas domestic market consumes about 150,000 tons of additives annually, up from 90,000 tons in 2002. The country has 30 additive manufacturers with total production capacity of 120,000 tons, generally meeting the demands of low-to-mid-grade lubes. PetroChina and Sinopec have set up joint ventures with Lubrizol and Infineum to produce additive packages. Lubrizol, Infineum, Afton Chemical, Chevron Oronite, RohMax and Ciba Specialty Chemicals are still the major suppliers of high-grade packages and special additives to China. Importing high-quality additives continues to be a major trend.

Until very recently, lube packaging and manufacturing equipment was imported. The lack of plastic packaging had a bad effect on the image of domestic lube oils. Now the situation has changed greatly, with rapid development of domestic packaging, printing and manufacturing equipment industries.

Battle for the High-end Market

Chinas lube market is fiercely competitive, and domestic lubricant companies are gradually achieving equality with the multinational companies famous brands.

PetroChina and Sinopec, formed in 2000 and 2002 respectively and both headquartered in Beijing, had more than 10 lubricant brands each. To improve their market positions and to forge international brand images, these two state-owned lubricant companies in 2004 consolidated all their brands into one each: Great Wall for Sinopec, and Kunlun for PetroChina.

The leaders from the two petroleum giants realized the importance of lubricant brand image to their mother companies, who want to gain more market share in petro-chemical products, and to explore world markets. This is also a possible way for the two giants to further reform their catalyst, bitumen and fertilizer businesses, where they want to form famous brands and compete with multinational companies.

In 1992, it was estimated that there were 4,500 lube blenders in China. But with the hiking prices of base oils, additives and other resources such as packaging and freight, many smaller blenders making engine oils have closed. Small blenders making specialty industrial lubricants have fared better. However, industry observers believe there are only 1,000 lubricant blenders in China today.

Chinas domestic lubricant companies have gained marketing and management experience over the past five years, and are increasingly investing in advertising on TV and radio, at exhibitions and sports arenas. Multinational petroleum companies began advertising their lubricants on television in 2004 to improve brand awareness in preparation for the 2007 opening of Chinas gasoline and diesel wholesale market.

More and more consumers are selecting domestic lubricant brands. Great Wall was ranked the number-one brand on consumer loyalty in 2004. Product quality is no longer cause for distinction between domestic players and foreign players.

In China, the lube consumption habit is Do-It-For-Me. Auto repair shops and service stations have been the major sales channel for oil changes. Lubricant sales to consumers are now becoming available through fast-lube centers, lube franchises, local sales agents, supermarkets, gasoline stations and others.

Future Trends

Chain retailers will be set up in the lube industry just as in the general merchandise industry. Large lubricant companies will use their advantages of scale, squeezing smaller companies out of business. However, due to their close cooperation with the automotive and other producing industries, small specialized industrial lube companies will exist for a long time. The industry will see severe competition based on brand, sales channel, OEM clients, after-sales service and value-added service.

Forced by cost pressures, automakers and other OEMs will begin seeking local lubricant suppliers. The relationship between auto companies and lube companies is changing, and domestic lubricant companies are competing successfully for this business. For example, Toyota Motors Guangzhou factory began using Sinopecs Great Wall API SM engine oil for factory fill in May 2004.

Lube companies will open new lube-related businesses, based on their famous brands and industry experience. These new businesses can include packaging materials, automotive services and auto chemicals, all of which have huge potential.

With decreasing profits on lower-grade popular lubricants, lube enterprises must also emphasize the high end of the market, and product diversity. They must pay more attention to industrial lubricants, high value-added lubes and greases, to research and development, to energy-conserving lubes and to biodegradable products.

Close cooperation with our OEM clients from the automotive, hydraulic system, power and gear box sectors will help us improve lubricant technology and promote equipment maintenance. We must do more research on additives, develop formulations to which we hold the patent rights, and develop our core competence.

Integrated Lubrication Solutions is a new lube-related business that Sinopec Lubricants Co. is opening this summer. We will work with heavy-duty diesel trucking fleets, power generation stations, paper and pulp mills, cement plants and the like, to save money for our customers and improve their satisfaction and loyalty.

Chinas lube market is characterized by growing competence. Chinas lubricant companies have improved quickly and face a bright future.