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Chinas Learning Curve


While the smart money in the lubricants industry continues to be on China, Chinas smart money is on capturing a bigger share of Asia.

Witness the opening on July 11 of Sinopecs gleaming new lubricants plant in Singapore. Located at Tuas on the southwestern tip of Singapore, the facility covers roughly 243,000 square meters, and is the petroleum giants first lubricants manufacturing site outside its home turf.

The plant has capacity to produce 100,000 metric tons per year of lubricants, the company said in a statement, and is already fully operational. Sinopec first announced it would invest RMB 580 million (U.S. $94.5 million) to build the Singapore plant in July 2011, calling it a model for future global expansion. It also said the plant aims to serve markets in Southeast Asia, Australia and New Zealand.

Sinopec boasts that the plant is equipped with the most up-to-date lube manufacturing and handling technology, 90 percent of it proprietary. Its also the first occupant of the Singapore Lube Park, an independently operated umbrella site that will serve adjacent plants being built by Shell and Total, too. While each of these three companies will operate its own plant on its own property, they also will share the Lube Parks infrastructure facilities such as an import and export jetty, common pipelines, dedicated storage facilities, and more. That will give them economies of scale and efficiency that they might not be able to attain as easily on their own.

Meanwhile, back in China, investment in the lubricants industry continues at a pretty ferocious clip. Lubrizol, the worlds largest supplier of lubricant additives, in late August began operations at a new additives plant in Zuhai, in the southern China province of Guangdong. The $200 million, 400,000-sq.ft. facility took two-and-a-half years to build. It makes selected additive components and blends additive packages for engine oil, driveline and industrial lubes, and will be increasing its production slate as demand grows, the company said.

Wickliffe, Ohio-based Lubrizol pegs Chinas demand for automotive lubricants at 4 million metric tons a year now, and says it will rise to 6.5 million tons (a quarter of the worlds total) by 2020.

As well, Shell broke ground last year on a world-scale lube plant in the northern China city of Tianjin, which will become its eighth in the country. The new Tianjin facility is expected to have 300,000 tons of lubricants blending capacity and to cost $100 million, according to Dow Jones Newswire.

These companies and others were attracted by Chinas seeming unquenchable thirst for lubricants, which saw a decade of fast expansion. The market research firm Kline & Co. said Chinas total demand reached 7.6 million metric tons in 2011, neck and neck with the United States in volume. But in 2012, according to the consultancys Milind Phadke, Chinas finished lubricant demand went flat and the market may even have contracted slightly. He attributed this in part to the governments efforts to rein in construction and avoid a housing bubble. Overall though, Kline continues to believe Asia is going to be the lubricant industrys engine of growth, anchored by China.

The market is becoming more crowded however, and the prospect of slower growth is increasing the pressure on lubricant companies trying to do business there. To remain competitive, Chinas lubricant plants will need to adopt the most modern production and management techniques, observes Annie Hanafin of the global consulting firm Malik PIMS. She sees the Chinese lubricants market quickly evolving and taking on the attributes of more historically complex markets like North America and Europe. And like producers in those mature lube markets, she added, Chinas plants will need to focus on minimizing costs and maximizing flexibility to survive.

Every two years, PIMS conducts a worldwide benchmarking study of more than 200 lubricant plants around the world, evaluating them by cost, complexity, equipment utilization and other metrics. The ongoing study has amassed two decades of data, which subscribers can use as a yardstick to measure their own performance against regional, global and/or look-alike plants of similar size. By observing what others have achieved, they can make better decisions about their own operations, and target specific areas for improvement, such as wasteful reblends, packaging inefficiencies, slops and flushes, packaging changeover times, warehouse bottlenecks and more.

Earlier this year, Hanafin, who is based in London, spoke at the CBI Lubricants Market Focus conference in Sanya, China, where she presented data on the performance of Chinas blending plants versus others that participate in PIMS benchmarking. She noted that Chinas small plants are growing in size, but still appear to be less nimble and flexible than their counterparts elsewhere.

No matter where they are, she reminded the CBI conference, every blending plant manager has a list of headaches he or she would like to cure. These range from raw material costs to equipment outages to delivery snafus to excessive inventory days. Everywhere you look, running a lube or grease blending plant is no picnic, She emphasized.

Historically, though, Chinas plants have been less complex, making fewer products and grades and handling fewer SKus than those in developed markets. By contrast, plants in North America and especially Europe have grown to be more complex and flexible due to tougher quality levels and OEM demands and stricter CO2 emission targets. European suppliers also have multiple language requirements for their packaging, further complicating their operations.

Scale is no guarantor of success, either. Looking at only large plants that make 85,000 tons a year or more, PIMS data from 2012 showed that those in China tended to produce lower volumes of lubricants than their peers elsewhere. Large Chinese plants averaged 163,000 tons of output in 2012, European ones were slightly higher at 166,000 tons, and North Americans tipped the scales at an average 203,000 tons a year.

When it comes to the variety of products manufactured in these large plants, Europe took the lead, with an average of 226 grades and 747 SKUs from each plant in 2012; that signals a very high degree of flexibility. Large North American blenders came in much lower (i.e., more streamlined), with 148 grades and 385 SKUs apiece on average. And Chinas producers averaged 168 grades and 337 SKUs. Successful large plants in China are agile and resilient, with smaller batch sizes to provide the flexibility required to handle many grades and SKUs, Hanafin pointed out.

The PIMS study also examined Chinas smaller plants (those making less than 85,000 t/y), and found that while these are increasing their volumes produced (an average 47,000 tons in 2012 versus 42,000 tons in 2008), they also are cutting back on the number of grades and SKUs they handle. That strategy is working right now, but they still need to be prepared to handle increasing complexity if they are to maintain their growth in volume, Hanafin commented.

Hanafin is busy enlisting more plants for PIMS 2014 benchmarking study, and expects the pool will include more than 200 lubricant and grease manufacturing sites worldwide. Besides identifying how individual plants can improve their performance compared to this cohort, the next round of data may show if Chinas facilities have drawn closer to those in Europe and North America – or have fallen further behind.

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