By George Gill
China’s estimated 2007 finished lubricants market of 5.3
million metric tons valued at $10.6 billion was second only to the United
States in volume, consultancy Kline and Co. concluded in a recent study, though
the country’s economy this year isn’t immune to the effects of the recession
gripping the U.S. and much of the world.
Geeta Agashe, vice president of Little Falls, N.J.-based
Kline and Co.’s Energy Practice, discussed the company’s study, “Opportunities
in Lubricants 2008: China Market Analysis,” during a Dec. 9 Web presentation.
“China is providing great potential for suppliers of
lubricant base stocks, lubricant additives and finished lubricants,” Agashe
said. “Even though this market holds a lot of potential, it’s a very difficult
market – extremely complex, extremely fragmented, and highly, highly
competitive. It is a market that is changing very rapidly. The types of
products consumed in China are distinctly different if you compare and contrast
them with those used in the U.S., the U.K., Germany or France.”
Economics
According to Kline, China had an estimated population of 1.3
billion last year. Its gross domestic product in 2007 was an estimated U.S.
$2.8 trillion. “It is the fifth largest economy in the world, only superseded
by the U.S., Japan, Germany and U.K.,” Agashe said. Kline estimates that
China’s GDP growth rate will remain around 9 percent in the coming years.
Direct foreign investment is around $67.5 billion.
Agashe explained that due to the collapse of the U.S.
financial markets and recessionary trends worldwide, China is experiencing and
is expected to continue to experience a slowdown, especially in its industrial
production and commercial trucking sectors. The first two quarters of 2008 for
China were robust and tracking forecasts, but the third quarter was flat, she
noted. The fourth quarter was expected to show a slight decline that Kline
anticipates will lead to a decline in the consumption of lubricants, more so in
the industrial and commercial automotive sectors.
She emphasized that Kline does not feel the overall lubes
market in China will show a negative decline in 2009 although it may not grow
at the same pace as it has in the past.
“China is a big economy within itself,” Agashe said. “After 2010, our
analysts feel a dip is expected to even out, and our forecasts to 2012 remain
unchanged.”
Kline cited as lubricant market drivers for 2007 to 2012
factors such as car sales that are expected to increase by double-digit percentages
per year and a commercial vehicle population forecast to grow above 5 percent
per year annually. Kline also expects primary metal, auto manufacturing,
machinery and mining industries to continue to show attractive growth.
Barriers for growth during 2007 to 2012 cited by Kline
include gradually longer change intervals, seal-for-life applications for some
lubricant products, introduction of state-of-the-art equipment that consumes
less lubricants, recycling of industrial lubricants, and improvements in
maintenance practices.
Competition
Large, semi-nationalized oil companies Sinopec and
PetroChina are considered local majors in China, and they are predominant in
the northern and southern parts of the country, Agashe said. Multinational
companies (MNC) doing business in China include ExxonMobil, Shell, BP, Chevron
(Caltex), Total, Fuchs, Petronas, Valvoline and others.
On an overall volume basis, local majors Sinopec and PetroChina
dominate with about 50 percent of the market. MNCs had about a 28 percent share
in 2007, with the remaining 22 percent taken by a variety of smaller local
blenders.
“It was significantly different 10 years ago,” Agashe noted.
“Then, they [Sinopec and PetroChina] accounted for far more than 50 percent.
You can see MNCs have become really aggressive. There’s also a lot of small
blenders that service very small geographic niches and certain end-use
segments.”
Segments
The automotive segment in 2007 totaled 2.9 million metric
tons with the following market shares:
-Heavy duty motor oil, 45 percent
-Passenger car motor oil, 25 percent
-Motorcycle oils, 11 percent
-Other (including automotive gear oil, grease, hydraulic and
transmission fluids), 19 percent
In the passenger car motor category, she said, about 70
percent of the volume consumed in China is made up of multigrade. “We don’t see
any usage of 0W as we see in North America, or in western Europe,” Agashe
noted. “They use a little bit of 5W grade, but frankly, most of the multigrades
that we see consumed in China are heavier viscosity multigrades, like 10Ws,
15Ws, 20Ws.”
According to Kline, China’s industrial segment in 2007
totaled 2.4 million tons and broke down as follows:
-General industrial lubricants, 38 percent
-Process oil, 36 percent
-Metalworking fluids, 12 percent
-Industrial engine oil, 11 percent, and grease, 3 percent.
“With all new power generation projects coming up in China,
we have seen significant growth in the turbine oil category, along with
compressor oils, refrigeration oils and industrial gear oils all growing,”
Agashe said. Process oils consumption is also increasing in China, she said,
primarily because the textile industry is big, and food processing is growing.
In the general industrial lubricants segment, about 60
percent of the volume is of mid- to high-end quality, Kline found, while 40
percent consists of very low-end products.
“Essentially, what we saw in many instances was that people
use just straight lubricant base stocks with limited, if any, additive
content,” Agashe recalled. “They call these ‘total loss system oils.’ They just
use them to top things off, and they are sold at very, very low prices.”
Agashe cautioned that those considering the China lubricants
market because of its size should look closely at what segments they want to
serve. “All of the 5.3 million tons might not necessarily be the kind of market
you want to play in, because some parts of this market are made up of very low-end
products,” she said. “Many of the multinational companies are really not
willing to or don’t wish to participate in that low end of the market.”
In 2007, China’s 5.3 million tons of lubricants were divided
into 46 percent industrial, 39 percent commercial and 15 percent consumer
(automotive), Kline estimated.
“This is different from some other, more mature countries
such as the U.S. in that China’s consumer market only accounts for 15 percent
of total,” Agashe said. Until the last 10 to 15 years, most people in China were
not able to own a car. “Vehicle ownership hadn’t come down to common people,
but it is changing very rapidly,” Agashe noted.
Sinopec and PetroChina dominate the industrial market, with
a 64 percent share. MNCs and local blenders have 18 percent each.
MNCs’ share is highest in the consumer market where they
have a 58 percent share, compared to 21 percent for local blenders and 13
percent for local majors.
“People who are now owning cars in China are extremely
passionate about their vehicles,” she explained. “You read different articles
about car clubs springing up in China. There’s a whole different subculture
that’s developing in China. They really buy into the brand messages and quality
messages by MNCs.”
In recent years, the local majors in China have strived
harder to compete on quality. “In the last, I would say, five years the local
majors – more so Sinopec – they really want to take this competition from the
MNCs head on,” Agashe said. “They invest in R&D, invest in proving their
product’s performance. Some of their products are pretty much in line with the
MNCs. No longer is that quality spectrum a big difference, especially in the
consumer segment.”
Local majors lead in the commercial segment with 45 percent
of the market, compared to 29 percent for MNCs and 26 percent for local
blenders.
Agashe said direct sales account for a very small portion of
the commercial automotive segment as well as the consumer automotive segment.
With industrial products, about 60 percent of total volumes are sold direct.
The consumer and commercial automotive segments are typically sold through
distributors.
“If you’re focused on the industrial segment, it might be
important for you to engage a direct sales force,” Agashe emphasized. “However,
if you want to be a player in the automotive segment, you also need access to a
good, solid distributor network.”
Fragmented market
Agashe said China can be divided into six economic market
regions based on criteria such as population, GDP, income, infrastructure and
culture.
“It’s really not a good idea to have one common strategy for
all of China,” Agashe said. “We don’t think one strategy, or one product is
going to resonate in all different regions and provinces. You have to look at
it from a geographic standpoint because of the value chain, but more
importantly, you need to look at all of these regions from the level of
economic development, and then you can have specific strategies and tactics for
these segments. What works in the border part of China may not work in the
interior of China.”
Agashe explained that China is considered a fragmented market
because “there are end users that are very different from each other. There is
a coexistence of imported, state-of-the-art and outdated vehicles and equipment.
In the interior regions we see a lot of outdated vehicles.” She said there is a
lot of fragmentation in terms of age, type of equipment, where equipment was
produced, and the technology that was used.
For more information on the report, visit http://www.klinegroup.com/reports/y584b.asp
