Growing automotive demand and manufacture in the GCC countries and Iran will drive increased consumption of higher quality base oils and lubricants
The Middle East has traditionally been a small consumer of newer and superior-grade engine oils. However, according to market players, this situation is expected to change significantly over coming years, driven by supply, demand and regulatory developments in the region.
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Growing demand for vehicles; regulatory measures on emission standards and vehicle safety; and an increased thrust on improved lubricant performance are key drivers expected to spearhead the shift towards sophisticated lube formulations, and drive demand for high-quality lube base oils in the near future.
SURGE IN VEHICLE SALES
The per capita consumption of lubricants in the GCC region has predominantly been lower than that in the developed economies. However, industry sources estimate this will change soon, as the region is expected to see a boost to its lubricants demand brought on by strong demand for vehicles.
In November 2013, US automotive major Ford announced plans to launch 17 new or refreshed Ford and Lincoln model vehicles over the next 24 months to accelerate growth in the Middle East and African markets.
POISED FOR GROWTH
The Middle East and African regions are poised to be one of the biggest growth markets globally. Ford has seen its sales in the Middle East grow by 60% between 2008 and 2012 and is now looking to expand its presence in the region further.
According to industry sources, the automotive sector in the Middle East has remained upbeat despite turbulence in many countries in the region. Almost every car maker reported sales growth in double digits percentages, between 20% and 40%, in 2012, and expects growth of over 25% in 2013.
This buoyant upsurge in vehicle sales is expected to drive sales of finished lubricants as well as lubricant base stocks.
According to an industry report from Frost & Sullivan, the automotive aftermarket in the GCC countries in 2012 was equally high-performing. Consumption is estimated to have grown between 15% and 20% to $7.5bn (€5.9bn). By 2016, the aftermarket sector is predicted to touch $14.4bn, of which lubricants form a fundamental part. The report predicts a likely growth of 15-20% across parts and accessories, lubricants, tyres, tubes and batteries over the next five years.
A similar trend is forecast for another growing market in the region – Iran. The second largest economy in the Middle East in terms of gross domestic product (GDP), Iran has the automotive industry as the second most active after oil and gas, according to Mojtaba Arabi Anaraki, dewaxing expert at Iran’s Sepahan Oil Company.
Anaraki, in his presentation to participants at the ICIS Middle East Base Oils conference in Dubai in October last year, said that Iran has become the largest automobile producer in the Middle East and produced 46% of all cars produced in the region and its neighbouring countries.
Iran’s car production increased by more than five times between 1998 and 2008, and is expected to sustain sound growth in the coming years, buoyed by a healthy youth population and high demand for private cars, Anaraki said.
However, industry sources estimate lubricant drain intervals will also increase, in line with improved engine technology and superior oils. Lower consumption per vehicle will thus partly offset the overall increase in lube demand, said Jaap Kalkman, senior partner at Roland Berger Strategy Consultants in his address to attendees at the conference.
LOCAL MANUFACTURING SETUP
Kalkman expects the GCC region will attract more attention as a potential destination for local automotive manufacturing and assembly activities.
The GCC region today has limited production capacity, which consists mostly of assembly operations in Saudi Arabia and the UAE. However, numerous campaigns are being undertaken to attract major automotive manufacturers to set up production units and some big names have taken note of this, Kalkman said.
Efforts are already evident. Saudi Arabia is offering massive initiatives to become the automotive hub in the Middle East. The fastest growing economy in the GCC, and certainly the most influential, is adding rail lines, expanding shipping ports, investing in workforce education, and offering other incentives to attract vehicle makers and suppliers.
According to industry sources, the country has targeted in-country passenger vehicle assembly to reach 400,000 units/year. This is expected to be achieved through the setting up of an automotive zone in Yanbu Industrial City that would feature vehicle manufacturing plants, Tier 1 supplier factories and shared facilities and services.
This is expected to further drive local demand to lubricants and the shift to high-performance products with improved distribution channels would get a boost. An organised set-up for manufacture and distribution of finished lubricants would additionally help bring down the number of small back alley puncture shops that can use low quality and fake products.
Furthermore, such a set-up would also encompass marketing efforts to make consumers more conscious of the products and brands purchased, and enhance adoption of best practices of engine maintenance and lubricant use.
INCREASING GROUP II/III SUPPLY
Multiple projects in the GCC are in operation or underway to establish manufacturing of higher-grade Group II and III base stocks. These include the now-operational Shell Pearl GTL facility in Ras Laffan, Qatar, with a total production capacity of 1.5m tonnes/year of Group III+ base oils, and the Neste Oil/BAPCO joint venture that produces 400,000 tonnes/year of Group III base oils.
The GCC region is expected to see a further increase in access to superior-grade base stocks with the recently started up ADNOC/Neste Oil Nexbase Group II/III plant producing 600,000 tonnes/year, and Luberef’s $1bn expansion to add 750,000 tonnes/year of Group II/III products at Yanbu, expected to commence operations in 2016.
While much of the increasing Group III supply in the region is intended for exports, local availability is expected to make these higher-grade stocks more accessible in the market and will bring down local prices, according to Kalkman.
Kalkman noted that efforts are being taken by regional governments to curb emissions and enforce regulations on vehicle safety. These include initiatives such as the switch to unleaded fuel and annual inspections in Saudi Arabia, as well as the UAE government’s directive for technical examination and a mandatory certification of imported vehicles on emission standards, and several more.
The UAE government has also banned the import of vehicles older than five years, and has stopped the registration of licences for vehicles older than 20 years. A well-regulated lubricant market is more likely to sustain long-term growth, industry sources believe.
INCREASED GROUP I SUBSTITUTION
The Middle East is expected to see a transition in its use of base stocks for lubricants manufacture. The presently popular Group I base oils are expected to be increasingly substituted by the move to advanced lubricant formulations using Group II/III grades.
A sizeable segment of the market, however, feels that Group I base oils cannot be done away with. Several Group I plants worldwide enjoy advantages such as low operating costs and have some highly specialised applications and benefits, something not enjoyed by Group II and III counterparts yet. This aspect is expected to play out in favour of the Group I base stock, as manufacturers worldwide strive to create a balance among different grades.
Veena Pathare is a markets editor, based in the ICIS office in Singapore