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Semi-synthetic metalworking fluids -which offer the desirable qualities of both soluble oils and synthetics -will see the best sales growth in the United States and Europe over the next five years. Their position will get especially stronger in cutting and grinding operations, says a recent analysis of the metalworking fluid market from Frost &Sullivan.

In the United States, the international market research firm said, total metalworking fluids sales for 2006 were expected to top $909 million. However, sales should reach $989 million by 2013, with a steady average annual growth rate of 1.2 percent.

In Europe, the future starts strong but then falters. From abase of 1,037 million in 2006, metalworking fluid sales will surge 4.5 percent in 2007, and go on to reach 1,130 million by 2010. After that, however,the market will flatten out and even shrink slightly,the analysis predicts.

Sreeram Raghuram, research analyst for specialty chemicals for the Palo Alto, California-based firm, pointed out that the fragmented metal working fluids market provides huge scope for consolidation opportunities -but so far it is not happening very fast. And even as many end users continue to look outside the United States for locations to open new manufacturing facilities, niche markets provide the best opportunity for growth, he noted. For both the United States and Europe, metal removal remains the largest metalworking fluid market segment, followed by forming, treating and protecting.

Raghuram said that with respect to consumption, Europe and the United States make up about 80 to 85 per cent of the global metalworking fluids market. The action is clearly moving to Asia, however.

With regards to Asia-Pacific, global players such as Quaker Chemical, D.A. Stuart, Castrol, Fuchs and Houghton International have facilities in Asia as well, he said. Apart from these, there are companies specific to a country such as Indian Oil Corporation and Hindustan Petroleum in India.

Consolidation: Slow to Catch On

From the 1990s to the present, numerous mergers occurred in the lubricants industry. But in the metalworking fluid arena, aside from a few cases of bigger companies acquiring smaller, local players, consolidation has not been as fast-paced, Raghuram told LubesnGreases.The last major acquisition that immediately comes to mind is the acquisition of Burmah Castrol by BP, he said.

He summarized three possible reasons consolidation hasnt picked up speed. One is the financial position of market participants. The next major consolidation mostly has to occur amongst the top metalworking fluid companies, and would require a lot of money to be pumped in, he said. However, increased raw material costs coupled with customers demand for cost-effective products has put a lot of strain on the profit margins of metalworking fluid manufacturers. This would probably explain the reason why companies are not engaging in any M&A[mergers and acquisitions] activity.

Another deterrent is the potential difficulty of managing a large out fit with dozens, even hundreds, of product lines. Maintaining constant focus could become an issue for global companies which cater to several other products other than metalworking fluids, Raghuram said.

Finally,theres the possibility of a company not being able to meet the demands of its customers, which are really diverse when it comes to metalworking.There are varying requirements for the cutting and grinding fluids, he explained. Water quality varies across the United States, and there are other region-specific factors to be taken into consideration while developing fluids. Thus, inability to provide quick solutions in spite of acquiring another product line could be another restraining factor that may be preventing companies from involving in M&A activity.

Still, Raghuramsaid, the market is ripe for consolidation and one cannot discount the possibility of some participants exiting the market in the future due to the financial strain.

The scope for consolidation would then widen, he added. Moreover, in a market as mature as metalworking fluids, with a very small possibility of organic growth, consolidation provides a major way to grow in the market.

Market Diversity Niche market applications look the strongest growth area at the moment, and companies who have excellent product development capabilities serving a specific set of customers are expected to benefit, Raghuram said.

He broadly classified metalworking fluid suppliers under four tiers. Generally, he said, Tiers 1 and 2 together consist of global specialty companies and global oil majors, and are often somewhat interchangeable. Positions may also vary based on the size and product range of the company.

Tier 1 consists of global specialty companies, for example Fuchs Petrolub, Houghton International and Quaker Chemical.

Tier 2 includes global oil majors (among them Shell, BP Castrol and ExxonMobil).

Tier 3 are country-specific companies, such as Pfinder Chemie in Germany, Teboil AB in Finland, Brugarolas S.A. in Spain.

Tier 4 is composed of smaller, regional players, especially those who cater to specific geographic regions and/or products lines.

For instance, a company may be operating only in a specific state such as Michigan, Raghuram explained. These smaller players have developed competencies catering to very specific needs of the customer, such as providing customized solutions for niche applications such as machining of nonferrous metals like magnesium, titanium and nickel.

While the top two tiers are fairly small with respect to the number of participants, Tiers 3 and 4 have large numbers of players fighting for a piece of the market, he said. The number of participants is thus very large and is difficult to gauge exactly. Germany, the largest market in Europe, alone has about 60 to 70 companies active in the market. In the United States, the number of participants could range from 100 to 200.

Consuming Trends

Additionally, Frost & Sullivans study highlighted several ongoing trends, the most significant being the geographical movement of end users such as automotive majors, who are departing the United States to open facilities in Mexico, China and India. In Europe, according to the analysis, movement of end users to Eastern European countries (apart from movement to China and India) has slightly offset the slowdown in the Western European economy.

The study also highlighted the impact of alternative technologies, such as dry machining and micro-lubrication in the United States and Europe, and said more companies in these regions are looking at lubricants based on vegetable oil bases as a serious alternative for petroleum based fluids.

Raghuram said the metalworking fluids market faces a variety of needs, among them:

Need for products to conform with customer specifications.

Need for biostability of soluble oils to ensure longer fluid life, reduced overall costs and worker safety.

Need to concentrate more on service in the wake of geographical relocation of customers.

Need for continuous product improvement capabilities to maintain performance and conform to regulations. He said regulation is especially important in European countries.

Likewise, the introduction of high-speed machining represents a shift from more traditional machining methods.

Technology advancements in equipment and processes in various end applications require customization to fit individual needs, Raghuram said. This poses considerable challenges under the stagnant demand for metalworking fluids in the United States.

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