Economic woes and political turmoil are suppressing South Americas lubricant demand in terms of volume, but these challenges have not arrested the continents drift toward synthetic lubricants.
Unlike its neighbor to the north, Mexico – which recovered fairly quickly after the global economic slowdown in 2012 – South Americas economic performance has deteriorated since 2013, consultant Sergio Rebelo of Factor de Solucao in Sao Paulo, Brazil, reports. Although global growth was around 3 percent last year, he estimated that the continents economy contracted by nearly 2 percent.
Speaking at the ICIS Pan American Base Oil & Lubricants Conference in Jersey City, New Jersey, Rebelo said many countries are struggling through political turmoil, and low oil prices are strangling crude exporters like Venezuela and Colombia. The countries in the region basically share the same kind of challenges, he said, including fiscal deficits, inflation, poor investment ratings and higher interest rates. This group of challenges leaves less room for the governments to develop any kind of encyclical economic incentives to make the economy grow fast again.
According to Factor, which is an affiliate of Kline & Co., the South American lubricants market ranks just behind Africa and the Middle East, and totaled 2.5 metric tons in 2014, or 6 percent of global demand. The continent has a bigger appetite for automotive lubricants than most regions – about two-thirds of its demand is automotive products, compared to half of the global market.
Before the recession hit, demand for lubes in South America grew about 2.7 percent per year from 2010 to 2013, Rebelo said. Actually, it was the fastest growing market in the world, ahead of Asia and other regions, he continued, sparked by GDP growth and a swelling vehicle parc. But lubricants consumption slowed with the economy and fell nearly 2 percent from 2013 to 2014.
Recovery will be a long, hard slog. We expect that the region will have two or three very bad years, said Rebelo in December, and we will start growing again probably in 2018 or so. It will reach the peak of the market – which was 2013 – only in 2019.
The good news about the market, Rebelo enthused, is that even if it has not delivered the growth rate that we are used to, it has certainly shifted in quality. The regions original equipment manufacturers are following the global trend toward smaller engines and greater fuel economy, encouraged by government programs, he said.
Nowadays, we have in South America OEMs that are pretty much aligned with their counterparts [in Europe] in terms of engine technology. Its all about fuel consumption; its all about down-sizing; its all about turbocharging and widespread direct injection. We expect these trends will certainly impact the lubricants market in the next five to 10 years.
Nearly three-quarters of South American vehicles sold in 2014 were of native origin, and Brazil produced 81 percent of them. Most factory-fill engine oil for passenger cars and motorcycles – which outnumber cars in Brazil, Colombia and Paraguay – was synthetic or semi-synthetic, said Rebelo. Heavy duty vehicles have been slower to adopt, but Factor sees a shift toward synthetics even in this segment.
Viscosity grades will continue to descend, remarked Rebelo. As monogrades fade, SAE 10W multigrades share of PCMO demand is expected to grow from 7 percent now to 9 percent by 2019, while that of 0W and 5W grades will triple to 18 percent.
The largest portion of the heavy duty motor oil market is SAE 15W grades, which Factor expects to increase slightly, while 0W, 5W and 10W demand doubles to 4 percent.
Overall, South Americas demand for synthetic engine oils will double over the next five years, Rebelo predicted. This will bring us much closer to the situation in the developed world, in terms of the role and the share of synthetics over the total market, he summarized.
As the largest economy in South America, Brazil has an outsized effect on regional demand. Alone, it accounts for 50 percent of regional GDP and 55 percent of regional lubricants demand. It is also the 6th largest country market in the world, taking 3.5 percent of the worlds lubes. However, it has suffered greater economic hardship than other countries in the region. Rebelo estimated that Brazils GDP contracted around 3.5 percent in 2015, and the forecast through 2019 hovers at 0.3 percent growth per year – lower than any South American country except Argentina.
Ricardo Mussa, CEO of Cosan Lubrificantes in Rio de Janeiro, offered a probing look into Brazils market at the ICIS conference. He reported that his country saw a dramatic economic decline in 2014 and is now going through a recession that is very close to a depression.
Mussa pointed out that the Brazilian lubricants market tends to echo the political situation, and he put the blame for most of the countrys economic woes squarely on its political instability. Still, he tried to strike an optimistic tone: Brazilians know what has to be done to fix things, so there is a reconstruction plan in place, he said confidently. We just need to fix politics.
Brazils biggest player in lubes is state-run Petrobras, which according to Mussa commands a 27 percent market share. Number two is Cosan, which sells Mobil brand oils in the region and has increased their share from 10 percent in 2008 – the year Cosan acquired ExxonMobils blending plant in Rio – to nearly 16 percent now. Cosan sold an estimated 320 million liters in 2015, owns a second blending plant in Kent, U.K., and is Brazils largest importer of base oils, Mussa added.
The number three lubricants producer, Ipiranga, holds a 15 percent share, he said, but both Chevron and Shell have lost market share and are down to 10 percent and 9 percent, respectively. Another multinational player is Petronas (9 percent and rising), but globals such as Castrol and Total hold less than 2 percent of the market each.
Breaking into Brazil is not easy for foreign brands, but the outlook for domestic and regional producers is more positive, according to Mussa. We see the lubricants market is growing, and in base oil there is oversupply, so this is a very good scenario. We see the lubricants business as very attractive right now and over the next four or five years, despite the fact that Brazil is having a crisis. The trend toward higher quality lubricants is helping. On average, if you ask me, he mused, we have four times more margin on a synthetic product compared to mineral.
The lubricants segment most affected by Brazils recession has been heavy duty motor oil, which makes up 36 percent of the countrys market. The average age of heavy duty vehicles here is 16 years, and the scrap rate is nearly 20 years – very slow compared to other countries, Mussa said. Unit sales have been halved as fleet renewal drags along. As a result, the market has been slow to upgrade to synthetics, and he does not hope to see much change even five years down the road.
The passenger car segment, which includes motorcycles, is still holding on, added Mussa. Yearly lubricants demand has grown to 2.9 million barrels and accounts for 37 percent of the market. Twenty percent of these vehicles use full synthetics and 26 percent use semi-synthetics, and Mussa foresees those figures climbing to 52 percent and 37 percent, respectively. With 44 percent of cars on Brazilian roads less than five years old and the scrap rate around 10 years, the fleet is changing over very quickly. Even with the crisis, you can see the growth of synthetics around 10 percent or 12 percent every year, and that will not change over the next years, he said.
While gasoline stations used to be the primary channel for oil changes in Brazil, selling nearly a quarter of PCMO in the country, this has changed in the past five years, Mussa reported. Mechanics workshops and auto dealers are now the major channels for selling and installing lubes – a change that may indicate a shift from do-it-yourself to do-it-for-me among Brazilian car owners.
Industrial lubricants are 27 percent of Brazils market, he continued, and hydraulic fluids and process oils make up half of that segment. A drive for fuel efficiency among equipment operators – stemming from a nearly 20 percent spike in energy costs in 2014 – is bringing some growth in synthetic sales.
In terms of base oil supply, Petrobras keeps the Brazilian market supplied with API Group I base stocks, but the company is going through a crisis, Mussa observed, and will not invest in making Group II for at least the next few years. For the most part, Brazil uses its domestic product internally – much of it consumed by Petrobras, noted Mussa – and makes up the balance with imports of Group II and III. While the country has a stable, local supply of rerefined Group II product, this has not been growing.
By 2020, he predicts that base oil imports will surpass local production. In the past, these barrels came mostly from Europe, but now they come from the United States and some from Asia. Regardless of their origin, nearly all must come into the state of Rio de Janeiro, where 70 percent of lubricants in Brazil are produced.
In Brazil and South America alike, limited volume growth is intensifying local competition, observed Factors Rebelo. He predicts that regional majors will gain market share over the next few years at the expense of national oil companies and regional independents, while global majors will remain flat. The regional majors have been very competent in reducing their gap against the global companies, counting on more flexibility, on distribution and on logistics, he explained.
In the last few years, the profitability of the lubricants market in South America was very dependent on the profitability of the synthetics and semi-synthetics market, Rebelo continued. In our view, how future profitability will be maintained…will have a lot to do with how these companies manage branding. We do believe that marketing as a whole will play a major role in that regard.
It is clear to us that the old-fashioned way of looking at this market is not enough anymore. We have huge differences between countries and segments within those countries, so business intelligence is going to be a key factor of success in the industry.