India Embraces Quality

The heady growth of recent years may be gone for now, but players throughout Indias lubricants industry remain upbeat about its prospects. Speakers at a conference in Mumbai said the market – estimated to be 2.6 million metric tons including process oils – is well-supplied with base stocks, is improving in quality and can cope with problems such as potential shortages of bright stock.

India is the worlds third-largest lubricant market, thanks in part to several years of demand growth rates in the high single-digits. That pace slackened in the past couple years, and demand actually fell last year, according to some analysts. The consensus seems to be that volume growth will remain modest for the foreseeable future, although there are bright spots such as tractor lubricants and diesel oils.

Quality is also on the rise in India and is likely to benefit lubricant companies because higher quality products usually bring higher prices and fatter profit margins. That indeed is happening at the moment, according to four industry insiders who participated in a roundtable discussion at the ICIS Indian Base Oils & Lubricants Conference in Mumbai at the end of April.

The Indian market is now in a very good position to upgrade, and it is upgrading – possibly more rapidly than some more developed markets, Afton Chemicals Harshad Jambaulikar said.

Other roundtable speakers agreed and said the improvements are showing up in a variety of ways. Engine oils, for example, are providing better protection and lasting longer.

This country used to have very short drain intervals. But now they are closer to [those in] Europe, said Y.P. Rao, vice president for global technology at lubricant marketer Gulf Oil International. He added that the improvements are due in part to availability of high-quality base stocks at attractive prices. Quite a few companies are making use of [API Groups] II, II-plus and III for product differentiation. I think there is likely to be more of that in the future.

Good for the Market

Moderators asked the panel whether they expect lube marketers in India to adopt mostly Group II in their formulations, as did blenders in the United States, or to follow Europes lead in using blends of Group I and III. Panelists said India will probably take a middle path because it has ample access to domestic and imported Group II and it sits between two Group III production hubs – the Pacific Rim and the Middle East.

We have the advantage of using both models, Jambaulikar said. We can pick and choose whats good for the country, whats good for the market.

Heavy-duty diesel engine oils constitute the second-largest segment of Indias lubricant market, after process oils. Moderators asked if panelists expect heavy-duty diesel oils in India to shift toward SAE 5W-30 or 5W-40 viscosity grades – a change that appears to be under way in Japan and Europe. Panelists predicted the Indian market will shift to 10W grades (15Ws currently dominate), but not to 5Ws.

All of these new OEMs are shifting over to 10Ws, commented S. Nandakumar of Indian Oil Corp., referring to foreign truck makers in India. Its possible that we will move to 10W over the next 10 years.

Another change is that bright stock availability has tightened the past decade or two, as numerous Group I base oil plants have closed. Group I plants were the principal source of bright stock because operators of Group II plants have not found it commercially viable to make it and Group III plants cannot. Some lubricant blenders say there are now shortages of bright stock, setting off a scramble for replacements.

Daniel Iannuzzi, of base oil trader Feedco, said he expects to see more closings of Group I plants, meaning that bright stock supply will continue to narrow. But he added that several other mitigating factors will keep serious shortages from developing. Formulators do have alternatives, such as heavy naphthenic base stocks and polyisobutenes, even if they cost more than bright stock. Also, some base oil producers may boost their output of bright stock, either through capital improvements or by operational changes. Refiners, Ianuzzi suggested, will have greater incentive to take such steps if bright stock supply tightens further, causing prices to rise.

Rao suggested that a dichotomy may develop between base oil plants, with Group I facilities maximizing output of bright stock and other heavy base oils while Group II and III plants focus on lighter grades. My thinking is that there is nothing to worry about regarding bright stock, he asserted.

Diesel Directions

In a pre-conference ICIS seminar, Rao further stressed Indias shift to higher quality, zeroing in on diesel engine oils. These are the largest category of automotive lubricants in India, he pointed out, and the market is quickly embracing products that last longer, provide better fuel economy and that are compatible with emissions control technologies.

The diesel category will see quite a few changes in coming years, and these present challenges for oil marketers, said Rao.

By Gulf Oil estimates, diesel engine oils account for 29 percent of Indias annual lubricant demand of 1.65 million metric tons (excluding process oils). Motorcycle oils are next, with 11 percent of the market, while passenger car engine oils are a distant 5 percent. Other automotive lubes account for 20 percent, and industrial lubricants the remaining 35 percent.

Indias diesel engine oil market is spread relatively evenly across performance categories. Twenty-four percent meet API CD or CF specifications (both long obsolete in North America and Europe), and 16 percent are CF-4, one step up from CF. Another 26 percent boast both CF-4 and Mercedes Benzs 228.1 quality, and only 3 percent meet CI-4 Plus. Monogrades make up 13 percent of the nations diesel engine oils, 40 percent are SAE 20W-40, and 44 percent are 15W-40.

There is significant interest on the part of operators to extend drain intervals, Rao noted. They want to reduce the amount of time that vehicles spend out of service. Twenty years ago, a typical drain interval for commercial vehicles in India was 8,000 kilometers. Today, some operators achieve 10 times that. To illustrate this step-change, Rao pointed to the intervals recommended by Tata Motors.

Tata sets heavy-duty diesel intervals at less than 20,000 km for city driving and 35,000 km for long-haul driving when using oils meeting CH-4 or Volvos VDS-3 specification. If CI-4 Plus oils are used, the vehicle maker allows intervals of 40,000 km for city driving and 60,000 km for long-haul.

Similarly, Ashok Leyland recommends 40,000 km intervals for city and long-haul driving when using CI-4 or VDS-3 oils – and double that for drivers using its proprietary engine oil.

India has not yet enacted fuel economy mandates for commercial vehicles, but Rao suggested that may happen in the future; meantime, diesel operators themselves are demanding greater fuel efficiency.

Fuel is a major cost for them, so improving fuel economy can make a significant difference in their profitability, he said. Switching to lighter oils is one immediate way to improve fuel economy. But, Rao added, reducing viscosity can eventually risk damage to engine parts if formulators dont take other steps to ensure engine protection. The future focus is on CO2 reduction and fuel economy without compromising engine durability.

Marketers of diesel engine oils have an opportunity, Rao said, if they can develop lubricants that satisfy requirements of multiple OEMs. A growing number of fleet operators manage multiple makes of vehicles and would like to minimize the number of lubes they handle.

Taking advantage of that and other openings could help if the market offers little chance for volume growth. The auto industry, especially the commercial vehicle segment, has been hard hit by the slowdown of Indias economy the past two years. Gulf foresees the countrys demand for diesel engine oils growing just 2 percent to 3 percent annually for the next five years.

Tractors Pull

As another session at the Mumbai meeting heard, Indias tractor market is the worlds largest, and some analysts say it will continue expanding at double-digit rates for the foreseeable future. It should come as no surprise, then, that demand for tractor lubricants is forecast to grow at healthy rates for the next several years.

Gulf Oil Corp. Ltd. President and Chief Executive Officer Ravi Chawla said the market is also shifting toward lighter products and greater penetration of genuine and tractor manufacturer co-branded lubes. This is a growing market, and it presents a sizable opportunity for all, he stated.

Tractor purchases in India topped 600,000 in 2013, accounting for one third of global demand, and there is still room for growth. The nation has 22 tractors per 1,000 hectares, which is low considering the prevalence of small land holdings. For comparison, the United States has 26 units per 1,000 hectares and China 28.

Gulf has not been a leading supplier in Indias agricultural lube market, Chawla acknowledged, but it recently conducted a large study of the market. The company estimates that India consumed 120 million liters of tractor lubricants in 2013, accounting for most of the agricultural sectors lube demand. Engine oils make up 49 percent of tractor fluid demand, Chawla said, and so do gear and transmission fluids. Greases and other products account for the remaining 2 percent. Other findings from the research:

More than 80 percent of Indias tractor owners have just one tractor, and tractor usage averages 15 to 20 days per month, more during harvest seasons. An estimated 40 percent to 50 percent use tractors for haulage and other non-agricultural uses.

This is not a do-it-yourself market: 80 to 85 percent of owners go to independent workshops for oil changes. Fifteen to 20 percent head to an OEM-authorized workshop for this service.

Drain intervals average about 250 hours, and mechanics influence 45 percent to 50 percent of purchase decisions, Chawla said. The rest are influenced by retailers and friends.

Native OEMs dominate this sector. Mahindra Group is the leading tractor supplier, with 41 percent of the market, followed by Tafe-Eicher (25 percent) and Escorts (11 percent).

To protect their units, original equipment manufacturers have been shifting their engine oil recommendations toward performance-specified fluids, Chawla said. Engine oils meeting API CI-4 or CI-4 Plus are replacing oils of CF-4 and earlier specs, first because they provide longer drain intervals and second because they are needed for operators to comply with the latest emission norms.

The market is also quickly moving to lighter weight engine oils. During the 2010-11 fiscal year, 70 percent of tractor engine oils were SAE 20W-40 multigrades. Their share slipped to 55 percent in 2013-14 and is forecast to hit 33 percent by 2018.

Chawla said there will also be a multifold increase in demand for universal tractor transmission fluids, as all OEMs are shifting to oil-immersed brakes for tractors of more than 40 horsepower, the fastest-growing category of the industry. But universal tractor fluids also present a challenge, he said. The industry lacks a uniform fluid specification, and developing one is a tall order.