After years of lukewarm volume growth, the Indian lubricants market has been witnessing a positive momentum since calendar year (CY) 2016.
Whether a company uses nuts & bolts, complex gear sets or high precision valves, keeping its equipment running efficiently is the key to profitability. Lubricants play an integral role in reducing friction between critical rotating or moving components, dissipating heat which can translate into equipment durability and availability.
Continued momentum in personal mobility space coupled with some recovery in commercial vehicle and industrial segments is driving the demand for lubricant in India. Though rising oil prices may pose a challenge, pick up in mining and infrastructure activities will brighten the prospects of lubricant makers. The Indian lubricant industry is estimated at 2.5 million kilolitres per annum valued at about Rs 32,000 crore and is expected to grow at 4-5% annually.
India occupies fifth position in the global lubricants market after US, China, Russia and Japan. According to Madras Consultancy Group (MCG), over the recent years, consumer awareness about usage of lubricants has improved leading to an increased demand for high performance products. The domestic lubricants industry is witnessing stiff competition among players leading to an overall shift in perception of lubricants market from a volume driven market to a value driven market.
Based on application, lubricants are broadly classified as automotive lubricants and industrial lubricants. Engine oil, gear oil, greases and hydraulic and transmission fluid are the products under automotive lubricant segment. Industrial lubricants comprise process oil, general industrial oil, metalworking fluids, industrial engine oil and greases Automotive segment is the leading consumer of lubricants in India. It is followed closely by industrial, transformer & white oils and process oils segments. There are over 30 players, both PSU and private, domestic and industrial, integrated and standalone. The industrial lubricants segment is dominated by PSUs and a different set of private players in segments such as transformer oils and process oils. The industrial or non-automotive segment comprises of sectors such as power, oil & gas, mining, metals, industries, road construction, marine, railways, and aviation etc. While general industrial lubricant occupies 40% share in the industrial space, transformer oil used in the power sector is also a large segment with a 40% share, according to a PhillipCapital report. “Almost 30% of industrial oil is hydraulic oil, followed by 20-25% of industrial engine oils. Cutting oils are estimated to have a 20-25% share. IOCL is the market leader in industrial lubricants with a market share of approximately 20% followed by Apar Industries at 15%, Columbia Petro at 10%, Raj Lubricants and Savita Chemicals at 8% each, HPCL at 6%, Shell at 5% and so on,” said the report.
Emission norms for auto
Poor air quality is forcing the Indian government to tighten emission limits and improve fuel quality. This bodes well for lubricant quality improvement and increased use of synthetic lubricants. Acceleration in mining and road construction activity can be further drivers going forward.
Companies are eyeing auto lubricants market and enhancing their presence through tie-ups, joint ventures, expansion, etc. Last month, Apar Industries, which has been marketing auto lubes since 2007, entered into a JV with PPS Motors Private Ltd (PMPL) to market auto lubricants under the AMPOIL brand (owned by PMPL). The focus of the JV will be to sell lubricants to the state government, central government, public sector or semi-government, defence and original equipment manufacturers.
Lubricants are made through a blending process where base oil and additive suppliers are universally accessible. While base oils account for about 50% of raw material cost, additives and packaging represent 35% and 15% respectively. In India, additives are supplied by three players - Chevron, Afton, and Lubrizol. From the highs of $105 per barrel in 2014 to the lows of $27 at the start of 2016, prices of oil have started a slow ascent. Though the prices will not reach the highs of 2014, rising crude prices will put some pressure on margins of lubricant makers. The lube industry is characterised by brand building, innovation, and premiumisation, which aids market share gains and pricing power. New products are launched based on largely homogenous specifications (like viscosity), though branding helps to boost customer preference.
Mining and infra boosting industrial lubes demand
Growth rates in lubricant volume during FY11 to FY16 were subdued with an average 1.5% in these six years. According to industry estimates, against an annual growth of 4-5% in CY10, it was flat to slightly negative in CY12/13, followed by some recovery (1-3%) in CY14/15, which was still weak. The deceleration was both in automotive and industrial segments. During this period, the non-automotive lubricant segment (industrial) was hit by mining, infrastructure, and general economic slowdown. The mining sector, accounting for about 8% of industrial lubricants market, witnessed bans in eastern India (Odisha and Bihar) leading to considerable demand weakness.
Since resuming power in May 2014, the NDA Government has been focusing on infrastructure development. With this, mining and road development segments are witnessing revival, thereby boosting industrial lube demand. Sectors such as power, chemicals, metals, automotive manufacturing, mining, road construction, and non-road transportation constitute the industrial lubricant segment. The ballpark indicator for industrial lubes growth is the IIP Index, which has seen stabilisation in FY17. The launch of initiatives such as ‘Make in India’ and ‘Smart Cities’ is strengthening the industrial recovery, which in turn could result in improved lube demand.
“Specialised industrial oils such as cutting oils, chain oils, cleaners, corrosion preventives, and heat treaters are lucrative industrial sub-segments with better prices and margins. These are mostly used by manufacturing sectors such as automobiles, machinery, and metals,” said the PhillipCapital report. Industrial recovery normal tends to percolate into higher logistics activity, thereby driving CV automotive lube demand indirectly.
Industrial segment: New opportunities
Being B2B in nature, the industrial lubricant segment, which is aggressive and competitive, is highly price sensitive market. The industrial segment caters to a wide range of consuming sectors (marine and aerospace, oil & gas, mining, power generation, road construction, automobile manufacturing, metals and machinery).
In manufacturing, metals sector is seeing an uptick, particularly steel. Specialised applications like metal cutting and honing are gaining traction and require premium oils. Companies offering specialised lubricants stand to gain not just in terms of volumes but also in margin.
“Industrial oils include hydraulic oils, heavy engine distillate oils, gearbox, air compressor, turbine, turbocharger oils, greases, seal oil, chain oil, cutting oil, and circulating oil. The industrial segment is marked by heavy lubricant consumption due to continuous engine/equipment operations. Therefore, an industrial and mining recovery could lead to a quick jump in lubricant consumption. Additionally, in this segment, promotion expenses are lower (though sectors like mining are located remotely, and hence require an efficient distribution system),” said the PhillipCapital report.
Tender-based procurement in segments (such as coal, railways, and defence) accounts for a sizeable share of business for industrial lubricant makers. For example, Coal India has huge lubricant consumption for equipment such as excavators, dumpers, and dozers. However, this type of business is led by L1 bidders; hence, it is mostly dominated by PSU oil marketing companies (OMCs).
MNCs gaining market share
Indian lubricants market which was a monopoly of public sector oil marketing companies, has witnessed the entry of multinational and domestic private players post liberalisation.
The growing industrial lubricants market is encouraging MNCs companies to consolidate their position in the country. For example, the US-based Quaker Chemical Corporation acquired the remaining 45% stake in its Indian joint venture, Quaker Chemical India Private Limited (QCIL), from its partner, Asianol Lubricants Pvt Ltd in December 2017. QCIL sells products to the steel and metalworking industries in India and has associates based in various locations around India. Quaker had been a joint venture partner in QCIL for 20 years.
"India is a market with strong growth opportunities in most of our business lines. This acquisition, along with our new plant in Dahej to be completed in 2018, further strengthens our position in India and allows us to simplify our overall corporate structure and improve our organisational efficiencies," said Michael Barry, Chairman, Chief Executive Officer and President, Quaker Chemical Corporation, in a press statement.
Increasing demand for lubricants is also forcing global majors to shift to local manufacturing instead of imports. Keeping in line with this trend, Dow Performance Silicones, a global leader in silicon-based technology and innovation, recently launched locally manufactured lubricants under its well-known Molykote brand in India. These ranges of five specialty lubricants cater to the growing local demand for high-quality and improved-efficiency materials. Molykote lubricants cater to a variety of manufacturing and processing applications across industries - sugar, textiles, automotive, oil and gas, cement, and aviation, among others.
“As smart manufacturing technologies gain momentum, our customers’ needs are evolving from commodities to customised specialty products. We continue to be committed to fulfilling these needs and to bring innovations to our Indian customers faster via best-in-class materials and technologies, newer product offerings, increased geographic reach and expanded R&D power,” said Dharmesh Shah, Commercial Manager for India, during the launch. As market rebound, many new players are expected to
enter the market, especially into premium or niche segment. For example, the UAE-based German Mirror Lubricants and Greases, a maker of premium lubricants, forayed into the Indian market through a distribution tie up with A N Corp - a part of R S Jhaveri Group. German Mirror Lubricants, which markets the premium range of Mirr Oils, has been catering to the needs of the engine, gear and transmission lubrication requirements of automotive, industrial, and marine industries for 17 years now.
As growth in Asia slows down, India has shown sparks of growth. India is an important emerging nation in the region registering a high growth rate for over a decade now. Improving consumer spending, accelerating infrastructure development and stronger FDI inflows in India are providing fodder for a rapid growth in lubricant consumption.
The per capita lubricant consumption in India is quite low compared to developed countries and other emerging Asian economies such as China and Indonesia, signifying potential in India for growth of lubricant market.
Engine oil grading was established by the Society of Automotive Engineers according to their viscosity characteristics. Currently, most oils are multi–grade – with a wide temperature range – particularly in winters and when the engine remains shut, to summers, and full–running and heating–up conditions respectively. Viscosity is inversely proportional to temperature. In a multi–grade oil with 5W–40 grading, the 5W bit (W is winter) implies the oil has a certain maximum viscosity/flow at low temperature. The lower it is, the better the oil’s performance under cold conditions. The 40 after W implies the thinning property at higher temperature. Higher the number, lower the thinning. Good quality oil should not lose its properties under different conditions, hence with higher grading range, the oil is considered superior. New–generation oils are more eco–friendly as well.
0W-30: Fuel economy
0W-40: Enhances engine performance/power
5W-40: Protection from wear and deposit build–up, good starting, and circulation in cold conditions, Mobility within the engine
5W-30: Better protection
10W-40: Good protection during starting out
15W-40: Better at reducing engine wear, increased drain intervals
10W-40: Basic protection
15W-40: Mass–market product
Source: “Indian lubricants sector: The road to recovery” by PhillipCapital in Institutional Equity Research