Despite political uncertainty, Egypts lubricants market is exciting analysts amid hopes that economic reforms will spur foreign investment and competition. They may be right-the government recently devalued the Egyptian pound by 13 percent against the U.S. dollar in a bid to replenish depleted foreign exchange reserves, making Egyptian assets attractive to investors. The International Monetary Fund forecasts a 3.3 percent increase in GDP this year, and expects that it will reach 4.3 percent in 2017.
Despite optimism, though, Egypts economic outlook seems unpredictable in the short term. The country is grappling with a public debt burden of 90 percent of GDP, according to research consultancy Capital Economics.
With a population of close to 90 million, Egypt is a major lubricants market. Kline & Co. estimates total finished lubricants demand at 441,000 metric tons, making Egypt one of the largest markets in Africa and the Middle East, a region that accounts for 8 percent of global demand. Last year, the Egyptian government hosted an investment summit-the Egypt Economic Development Conference-that attracted over $60 billion in investment pledges, mainly in the construction, oil and gas, power generation, transport and infrastructure sectors, the consulting firm reported.
Mouyad Nashar, senior consultant at Kline, said Egypt has significant API Group I capacity and plans to increase production to cover growing demand from the domestic finished lubricants industry. Speaking at the Base Oil & Lubes Middle East conference in Abu Dhabi, United Arab Emirates, Nashar estimated that local refiners supply 65 percent to 75 percent of total demand.
Ties between Egyptian oil companies and the government run deep, and domestic base oil producers exert a powerful hold on the market. Egyptian General Petroleum Corp. is the principal national oil holding company and regulates base oil production and distribution in the local market. Along with other market participants, particularly multinational blenders, EGPC compensates for the supply deficit with imports.
The government seems alert to the supply shortfall. During last years investment conference, the Ministry of Petroleum unveiled plans to award a 20-year license for the development of a new 120,000 tons per year base oil complex in the Suez area, to be on stream by 2019, Nashar said. Suez Oil Processing Co.s plant is running at a very low utilization rate. Its an old complex and it seems the investment is to replace this plant, explained Nashar. However, he cautioned, it is not clear whether the project will be a stand-alone plant or an upgrade to the existing one.
While the government plans to ramp up API Group I capacity, which accounts for around 95 percent of demand, there are currently no plans for adding Group II or Group III base oil production in Egypt, said Kline.
Automotive Dominates the Market
Persistent problems with infrastructure, notably in the power sector, and poor quality public transportation have dented demand for industrial lubricants. The automotive sector, on the other hand, has accelerated to 78 percent of total lube demand.
Almost two-thirds of Egypts demand-around 281,000 tons-is generated by commercial vehicles using monograde engine oils in the freight and transportation sectors. Political unrest and volatile economic conditions have also hit industrial lubes, but at around 96,000 tons in 2014, it is still one of the largest markets in the region.
Passenger car motor oil has witnessed the fastest growth thanks to the growing car park and resilient consumer sentiment. A lot of people live outside cities, and they depend on their personal cars to get around, Nashar elaborated. Kline estimated the total vehicle fleet to be 7.5 million in 2014, the latest year for which figures are available. Accounting for 89 percent of the market, high use of multigrade oils can be credited to original equipment manufacturer recommendations, finished lubes suppliers efforts and consumers propensity to properly maintain their cars, Nashar continued.
Yet, the legacy of Egypts turbulent economic history means obsolete engine oil categories like API SF are still widely used. When we consider monogrades, consumers prefer dark, thicker oils, as they believe it is better for their type of situations, said Nashar. Even so, newer categories including API SN and SL are gaining ground-now estimated at 42 percent, he added. Perceived positively as the one size fits all solution across all seasons, SAE 20W-50 has a high market penetration. Synthetics, including blends, account for about 8 percent of total demand, driven by auto dealership consumption for under-warranty maintenance.
In the commercial automotive sector, heavy duty motor oils account for over 80 percent of lubricants consumed. Factors such as price sensitivity, fleet age, maintenance practices and harsh environmental conditions have fueled the use of monogrades, Nashar claimed. Lapsed API service categories including CD, CF and CF-4 are still prevalent, while active categories such as CH-4 and CI-4 are far less common. HDMO drain intervals are short, in the range of 1,500 to 2,000 kilometers. Over 80 percent of commercial lubricants demand is consumed in on-highway applications such as freight and transport. Synthetic lubricant use is nominal, accounting for just 1 percent to 2 percent of total demand.
Industrial lubes were hardest hit by the economic problems of the last few years, as well as lingering power infrastructure issues. Kline divides the Egyptian industrial lubricants market into five categories: general industrial oils, which commands 61 percent of the segment, industrial engine oils (17 percent), process oils (10 percent), grease (9 percent) and metalworking fluids (3 percent). Nashar said hydraulic fluid is the main sub-category in the general industrial oils segment, with antiwear ISO VG 68 the most prevalent grade. Marine oil is the leading sub-category within the industrial engine oils segment, and transformer oils are the dominant application in the process oils segment.
Synthetics and blends account for 4 percent to 5 percent of industrial lubes demand, according to Klines estimates. Typical offerings include grease, fire-resistant hydraulic fluid, compressor and refrigeration oils. Typical end-use industries include cement, steel, quarrying, and oil and gas.
A Few Control the Majority
The significance of the Egyptian finished lubricants market is best illustrated by the production presence of most of the worlds leading blenders. ExxonMobil leads the market, supplying a quarter of total demand, and is particularly dominant in the automotive and synthetics sectors. ExxonMobil has two or more plants in Egypt. They have an excellent reputation and they are leaders in synthetics, Nashar observed.
National oil companies CO-OP and Misr Petroleum together account for almost 40 percent of the market. They have significant blending capacity, which is also used for toll-blending. The nationals are the main suppliers to the industrial segment.
Shell is the second largest global supplier here, with a strong presence in the automotive segment due to its multiple tie-ups with OEMs and a strong brand name. Total, with 7 percent market share, operates a joint venture with Oil Libya including a 34,000 square meter lubricant blending plant near Alexandria with production capacity of 40,000 metric tons. Total seems to be aggressive in the sales channel and to have good growth rates in the market, said Nashar.
Other active competitors include Chevron, Petromin, BP, Enoc, Emarat, Wataniya and Fuchs. For some years, Saudi Arabias Petromin has been attaching increasing resources to the Egyptian market as a result of the close political and economic relationship between Riyadh and Cairo.
The head start these international brands have in Egypt render it a difficult market to penetrate, Nashar said, but one that could be a good long-term bet. Egypt is a promising market, but it is very challenging because of the heavyweight competition. In other countries you can see all multinationals, but in Egypt you have the affiliation between the national oil companies and government.
Nashars advice to potential market entrants is simple: Prepare a detailed plan and look carefully at the various channels open to you. There is evidence of recent successes; in 2014, Gazpromneft Lubricants entered Egypt through a tie-up with a major distributor, suggesting the Egyptian market still holds promise for medium- to long-term investors.
Kline forecasts the finished lubricants market will grow at a compound annual growth rate of 1.7 percent through 2019, driven mainly by demand in the automotive segment. Nashar expects automotive lubricants, particularly in the consumer segment, to increase at a faster pace due to the growing vehicle population and a higher projected GDP per capita. We think 1.7 percent [growth] might increase if everything goes as planned, he mused.
However, economists say hopes pinned on Egypts expanding middle class as the main source of increased consumption could be misplaced. Inflation has held back the economy for years, and the governments current economic policy could produce a rapid uptick in the rate of inflation.
According to Kline, volume growth in the lubricants market will slow down in the longer term as multigrade engine oils gain ground and drain intervals lengthen in the PCMO and HDMO segments. The consultancy also predicts that higher fuel prices-due to government plans to gradually eliminate subsidies-will have an impact. Kline cautions that the industrial lubricants segment could show lower growth rates, as the sector depends on the successful execution and delivery of planned projects in construction, infrastructure and power generation.
Regional Uncertainty Adds to Complexity
Egypts return to economic normality could be tested by further instability in the Middle East. The country is supported by members of the Gulf Cooperation Council, and there is no doubt the precipitous decline in oil prices has bitten Gulf economies hard.
Saudi Arabia, the regions largest economy and a major donor to Egypt, is undergoing profound changes to its political and economic structures. It is also embarking on a major overhaul of refiner Saudi Aramco, which is likely to culminate in an initial public offering of 5 percent. If so, Egypts base oils and lubricants sector could benefit from further Saudi investment downstream.