INDIAN LUBRICANT INDUSTRY - SHRINKING MARGINS

Declining demand growth of automotive lubricants, increasing competition on account of the

presence of a large number of players, and increasing raw material costs and marketing
expenditure are leading to declining player margins in the lubricant industry.
Global Scenario
Global demand for lubricants in the world is estimated at around 41 million (mn) KL.
Automotive lubricants account for around 54%, Industrial lubricants for around 41% and
Marine lubricants for the balance.
Globally, the lubricants industry has been growing at 2.0-2.5% per annum in the past five
years. In developed countries, automotive lubricants have been growing at a slower rate of
1.0% per annum on account of the saturation of vehicle population, improved engine
technology and better quality of oil.
The region wise distribution of lubricant demand worldwide is shown below:
Region wise Demand
North
America
28%
Europe
35%
Asia Pacific
25%
Central -
Southern
America
12%
Source: Published Sources
Asia is the third largest market for lubricants in the world and is expected in future to grow at
a faster rate as compared to other developed markets. Asias share in the world lubricant
market has increased from 22% in 1993 to 25% in 1998. The per capita consumption of
lubricants in different countries is shown below:
Country Per Capita
Consumption (Kg)
America 31.0
Europe 14.0
China 2.0
India 1.0
Source: Published Sources
I nternational Consolidation
The global lubricants industry consists of more than 1700 players of which less than 2%
control around 70% of worldwide sales.
The years 1998 and 1999 have witnessed a number of mergers in the oil industry. These
included the three largest mergers in the petroleum industry in recent times. In late 1998
British Petroleum Plc, UK merged with Amoco Corporation, USA followed by the merger of
Total SA, France, with Petrofina, Belgium. The last merger was that of Exxon Corporation,
USA with Mobil Corporation, USA, which created the worlds largest publicly traded oil
company. Though the major merged entities are mainly petroleum or energy companies, they
are also large players in the lubricants industry. Exxon was the worlds largest base oil
manufacturer, while BP, Amoco and Mobil also had strong lube operations. These mergers
have changed the structure of the industry significantly. The latest consolidation specific to
the lubricants industry has been the acquisition of Burmah Castrol Plc, UK, the worlds
largest player in the consumer (retail) lubricants segment by BP Amoco Plc, UK.
The mergers have further concentrated a large part of the world lubricant market in fewer
hands. Additionally, most of the merged entities are also large suppliers of base oils
worldwide. Hence, the mergers have further concentrated this market, with majors like
Exxon, Mobil, controlling the base oil market. This is increasing the volatility in the base oil
supply and hence, price.
Further consolidation is expected in the global lube industry, especially as independent
lube manufacturers would be affected by the sharp rise in base oil prices, following the
increase in crude oil prices.
Technology Developments
Automotive engineering technology has improved significantly in the past few years, with a
corresponding impact on the improvement of lubricant quality. Improving engine and
lubricant technology has resulted in the decline in the lube to fuel ratio
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. Additionally, there
has been a demand from both the OEMs and the customers for better quality lubes with longer
life, better properties and lower deposit formation, meeting the stringent emission standards
required.
A critical requirement for the manufacture of high quality lubricants is the quality of base oil
used. Limitations on the physical properties of Group I base oils in various products is
expected to result in an increased demand for Group II/III base stocks. Group III base stocks
can be manufactured only by newer processing technologies like hydrocracking combined
with other processing stages like hydro-isomerisation, iso-dewaxing and catalytic dewaxing,
which would require additional investments from the lube refiners. Group III base stocks will
also facilitate compliance with the API P 9 emission standards scheduled for 2002. It is
estimated that by 2005, 40% of base oils worldwide will be hydrocracked. The new plants
require high investment costs, but can make base stocks from a broader range of crudes,
including crudes with high sulphur content.
The group I I /I I I lube base oils would cost more than Group I base oils. Hence a shift from
Group I to Group I I /I I I base oils would put further pressure on the margins of lubricant
manufacturers.
Indian Scenario
India is the sixth largest lubricant market in the world, with a consumption of around 1.12
million KL in 1998-99 (an effective market size of Rs. 55-60 bn.) as against an installed
capacity of 1.6 million KL and has grown at a CAGR of around 7.0% over the period 1993 to
1998. However, with the industrial downturn and also slower growth in the automobile sector,
the growth of the industry has slowed down to around 4.0% in the last few years.
Till 1993, the Indian Lubricant industry was totally controlled by the Government, with the
Oil Co-ordination Committee (OCC) controlling all aspects of the Industry. Thus, the
industry was dominated by the oil Public Sector Units (PSU) - Indian Oil Corporation
Limited (IOCL), Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum
Corporation Limited (BPCL). Castrol was the only major private sector player in the industry.
The market shares of the key players in the industry as in 1998-99 is given below:

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The amount of lubricants used per litre of fuel consumed.
Market share - Lubricants
IOC
34%
HPCL
18%
IBP
2%
Gulf Oil
6%
Tide Water
4%
Castrol
19%
BPCL
8%
Elf
3%
Others
6%
Source: Published Sources
The lubricant industry in India can be broadly classified into two segments - Automotive
Lubricants and Industrial Lubricants, with automotive lubricants accounting for over 60 % of
the total lubricant market.
The automobile lubricant market has grown at around 4% from 1993-94 to 1998-99, with the
commercial vehicle segment accounting for about 70% of the total consumption of
automotive lubricants. Indias per capita consumption of automotive lubricants is low at
around 1 Kg per annum on account of the low penetration of automobiles in the country.
India has the second largest railway network, fifth largest mining industry and is the twelfth
most industrialised nation in the world. Hence, industrial lubricants account for about 40% of
the total lubricant market in India and have grown at a CAGR of 13% from 1993-94 to 1998-
99.
Recent Trends
I ncreasing I ndustry Competition
In 1993, the Government liberalised the lubricants sector and announced a number of
regulatory changes. These included
Entry of foreign companies into the Indian market.
Decanalisation of imports of base oil.
Decontrol of pricing of base oil.
Reduction in customs duty on base oils (progressively reduced from a peak of 85% to the
current level of 25%).
The deregulation of the lubricant industry has had a severe impact on the structure of the
Indian lubricants market. Lubricants have the highest margin among refined petroleum
products. Companies earn between 20-30 times more from selling lubricants than other
petroleum products. Such a lucrative business encouraged foreign majors like Shell, Exxon,
Mobil, Caltex, Elf etc., to enter the Indian market. Currently, the industry is highly
fragmented with over thirty players as compared to the five in 1993. The share of public
sector companies has declined from 90 % in 1991 to less than 70 % in 1999. The change in
the market share has been predominantly on account of rapid developments in technology,
marketing, and distribution strategies of companies.
Declining Automotive Demand Growth
A critical feature of a lubricant is the time required before it needs to be changed. This feature
called the drain life is a function of the quality of the lubricant, the amount of contact between
the two surfaces and length of use of the machine or automobile.
Improving lubricant technology has progressively increased the drain life of lubricants.
Additionally, significant improvements in automotive engine design has also had an impact
on the drain life of lubricants.
Over the medium term, with improving lubricant quality and engine design, the drain life for
lubricants in an Indian car is progressively expected to increase.
The improvement in drain life is expected to contribute to a slower growth of replacement
demand in the future.
I ncreased Dependence on I mports for High Quality Base Oil
Availability of the required quality of base oil is a critical factor in the growth of the Indian
lubricant industry. Till 1993, on account of the canalisation of base oil imports, growth of
private players was constrained. However, since then with decanalisation of imports, private
players (especially Castrol) have been able to grow at a significant rate, as they have imported
their requirements of base oil.
Currently, indigenous production of base oil is from three refineries IOCLs Haldia refinery,
MRLs Manali refinery and HPCLs Mumbai refinery with a combined capacity of around 0.8
MMTPA. While IOCL and HPCL utilise the base oil produced in their refineries for both
their in-house blending plants and for external sales, MRL sells the entire production from its
refinery.
However, since the base oil produced by domestic refineries does not meet the quality
requirements of lubricant manufactureres, majority of MNC players prefer to import their
requirements. Secondly, private players are able to get the supply of these from parent
companies or from global vendors.
Globally, since the commodity is controlled by a select set of world majors like Exxon,
Mobil, Chevron, any disruption in their output could severely impact base oil availability and
thus prices.
Additionally, since refineries determine their product profiles based on the refining netbacks
on a certain crude, it is possible that there might be a shortage of base oil, especially in the
summer months, when more light crudes are processed to meet gasoline demand
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.
Presently, on account of the unavailability of quality base oil, prices for the most popular SN
500 grade had increased from US$187 per tonne in March 1999 to US$345 per tonne in
February 2000.
The recent price rise has put pressure on lube manufacturers in I ndia. Thus, with domestic
refineries unable to provide base oil of requisite quality there has been a trend towards
higher imports. This would impact the margins of players, as players are unable to pass on
the increase in costs to customers in this highly competitive market.

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Base oil is a heavy end. Hence, any refinery producing base oils would also produce a higher quantity
of heavy ends and would also need to use heavy and waxy crudes. Gasoline maximisation is through
the use the of sweet, light crudes and would not produce higher quantities of heavy ends. Hence, a
refinery producing base oil would also need sufficient secondary processing facilities to meet gasoline
requirements.
Changing Marketing Strategies
There has been a shift in the customer preferences in buying lubricants. Brand name, price,
accessibility and services offered are becoming the deciding factors for choosing between
brands. Thus, the strategy in the Indian automotive segment has progressively been shifting
from the sales push, commodity type marketing strategy to a brand pull, fast moving
consumer good (FMCG) product type of marketing strategy. This is especially in case of the
Bazaar trade, which currently accounts for around 40% of the sales of the automotive
lubricants in India.
With the product definition of a lubricant is undergoing a change from a commodity to a Fast
Moving Consumer Good (FMCG), a wide distribution network and a good brand image are
the most important success factors in the automotive lubricant industry.
In the medium term, the players in the industry are expected to increase advertising expenses
with a lot of focus on development of brand image and improving brand equity.
Higher dealer discounts, longer credits and higher inventory are becoming the norm of the
day. Margins are declining due to increased expenditure in product promotion, discounts and
incentives and money blocked in receivables. PSU oil majors, constrained by their
profitability in their principle lines of business are increasing aggression in lubricant
marketing through tie-ups with international oil majors to increase penetration in the bazaar
trade. IOC has captured a 10% market share in the bazaar segment.
Conclusion
With the slower growth rate in the automotive segment, declining margins on account of
rising base oil prices and increasing competition on account of the presence of a large number
of players in this segment, players are expected to focus on Industrial lubricants as the key
area for future growth in the Lubricant Industry.
But, although, private players are increasing their presence in the industrial segment,
penetration in this segment is expected to be slow on account of the well-entrenched position
of the existing PSUs and the long gestation periods associated with establishing a clientele in
this segment.
Thus, with the competition in the industry intensifying, a period of price competition followed
by consolidation is expected over the medium term, with smaller players either exiting the
industry or merging with larger players.