By Nancy DeMarco
KUALA LUMPUR, Malaysia – Competition, internal market changes and the global recession are influencing the direction of China’s 5.5 million ton lubricant market, an expert said. Higher-end engine oils (API SG and above) will account for 80 percent of the consumer market by 2013, up from 60 percent today, while consolidation will continue, driving most local independents from the market.
Flora Liu, a manager with consultancy Kline & Co. based in Shanghai, provided an overview of China’s lubricant market at the ICIS Asian Base Oils & Lubricants Conference here last month.
“China’s lubricant market was estimated to be 5.5 million tons, valued at U.S. $12.1 billion, in 2008,” Liu said. By volume, the market is 46 percent industrial oils, 39 percent commercial automotive oils, and 15 percent consumer automotive (including the lubricants consumed in all gasoline-powered vehicles, such as passenger cars, motorcycles, mini-buses and taxis).
Although the consumer automotive segment is the smallest by volume, it accounts for 37 percent of the market by value, or nearly $4.5 billion, said Liu.
Local majors PetroChina and Sinopec dominate the market on a volume basis, with 54 percent of the market, said Liu. Multinational oil companies, including Shell, Chevron, BP, ExxonMobil and others, have 28 percent of the market. The remaining 18 percent is shared by “local minors that may number 1,000 or more.”
Driven by business with original equipment manufacturers, Liu continued, multinationals have 50 percent of the consumer automotive segment, but just 30 percent of the commercial automotive and 20 percent of the industrial oil segments. Local majors dominate the industrial segment, with a 62 percent share, and have 40 percent of the commercial and 35 percent of the consumer segments.
The global recession, shifts in the Chinese market, geographic disparities and competition are all shaping China’s lubricants market, Liu said. “The impact of the global recession has been less severe in China, which had the highest GDP growth rate of 6.1 percent in the first quarter of 2009.” Total car sales in China soared from January to May 2009, up 30 percent from the same period of 2008, driven by government incentives. This lays a solid foundation for high consumption of consumer automotive lubricants.
Commercial automotive lubricant applications hit hard by the recession only represent about a quarter of the total commercial segment, Liu said. For example, the manufacture of trucks for export is strongly impacted, but agriculture, buses and trucks for domestic use continue to be healthy. Industrial lubricant applications are even less severely impacted by the recession, with food, chemicals, machinery, fabricated metals and aviation, marine and railway sectors showing little or no effect.
Expect attractive market growth in China’s consumer and commercial automotive lubricant segments. Double-digit car and agricultural vehicle sales are expected through 2013, although, Liu cautioned, “exports may be hurt.”
China’s lubricant market is evolving rapidly, Liu contended, with higher quality lubricants demanded for all applications. For example, in 2008 higher quality passenger car engine oils, API SG and above, accounted for 60 percent of the market, but their share is expected to rise to 80 percent by 2013.
The picture is the same on the commercial automotive side, where higher quality oils, API CF-4 and above, accounted for only 30 percent of the market in 2008. That share will increase to 45 percent by 2013, Liu said.
Channel shifts are also taking place, Liu continued. Authorized garages’ share of the oil change market will rise from just 10 percent in 2003 to 55 percent in 2013. Quick lubes, virtually nonexistent five years ago, will have 15 percent of the oil change market in 2013, while general repair shops will be the big losers.
“Direct sales will increase further in the business-to-business areas of the commercial and industrial segments,” Liu said, as both the local majors and the multinational oil companies increase their direct sales.
“China is not homogeneous,” Liu noted, “and the east and south have lately accounted for about 60 percent of the lubricant demand. But market dynamics are changing, as business moves north and west.”
Finally, said Liu, competition is changing the face of China’s lubricant market, particularly the competition between the multinationals and the local majors PetroChina and Sinopec. “Competition has evolved to be on a value chain basis,” she went on, covering raw material supply, growth through mergers and acquisitions, technical capability, optimizing distribution networks and penetration of the OEM markets.
Local majors’ advantage in control of domestic API Group I base stocks could be challenged, as premium base stocks become increasingly available from Korea, Southeast Asia and elsewhere, said Liu. For local independents, base oil supply is a major issue. “Base oil supply in China is tightly controlled by local majors,” leaving the independents to struggle to survive as suppliers of low-end products.
“Local minors will continue to be acquisition targets, and most local minors will get out of the market, as the industry goes through a period of consolidation,” Liu concluded. She predicted that the multinationals, through mergers and acquisitions, will continue making inroads into the middle-tier of the market, while local majors will succeed in establishing more comprehensive distribution networks.
“Local majors and the multinationals will compete for technical capability and OEM penetration as more lube formulations are developed locally,” said Liu.