Flat sales forecasted for global industrial oils and grease
Kunal Mahajan, Kline & Co. | TLT Market Trends April 2018
Growth opportunities will come from synthetics, OEM tie-ups and value-added services.
© Can Stock Photo / kadmy
KEY CONCEPTS
•
The global demand for general industrial oils and grease was 6,400 kilotonnes in 2017.
•
The market is fragmented with no industry accounting for more than 15% of total consumption.
•
Growth in the usage of synthetics is the most prominent industry trend.
General industrial oil and grease products are essential for the smooth operation of various equipment found in any manufacturing facility and, as a result, are used extensively in several industries. These lubricants are used in various equipment to protect them against wear, friction, heat, corrosion and contaminants. General industrial oils and grease include six types of lubricants: hydraulic fluids, industrial gear oils, turbine and circulating oils, compressor and refrigeration oils and industrial grease.
Market overview
The global demand for general industrial oils and grease was about 6,400 kilotonnes in 2017. This translates to approximately 16% of the total lubricant demand, including automotive lubricants as well as other industrial lubricants.
Hydraulic fluids, with more than a 50% share, lead the market for general industrial oils and grease. They are used to operate common equipment such as die casting, metal rolling and hydraulic pumps and motors, which are seen in many manufacturing facilities. This makes hydraulic fluids the most consumed general industrial oil globally. It is followed by industrial gear oil, turbine and circulating oil and grease, with each accounting for about 10%-15% of the general industrial and grease demand. The remaining market is accounted for by compressor oil and refrigeration oil (
see Figure 1).
Figure 1. Global general industrial oil and grease demand by product, 2017.
Asia is the largest market, accounting for more than 40% share in the total consumption of general industrial oils and grease. Asia leads the world in mining, primary metals, transport equipment manufacturing, power generation and general manufacturing industries, which are the major consumers of general industrial oils and grease. Asia is followed by North America and Europe, each having a more than 20% share in the consumption of general industrial oils and grease. The remaining market is accounted for by South America, Africa and the Middle East.
Regional markets can be classified into two categories: developed markets and developing markets. Developed markets include North America and Europe, while developing markets include the Asia-Pacific region, South America and Africa and the Middle East. There are two major differences between developed markets and developing markets.
First, developed markets have much higher usage of better quality lubricants, such as synthetic lubricants, compared with developing markets. For example, the share of synthetics in overall consumption of general industrial oils and grease is more than 15% in North America and Europe. The corresponding share in the Asia-Pacific region is 10% and even lower in South America, Africa and Middle East.
Second, there are differences in the purchasing practices of end-users. For example, end-users in developing markets are more price sensitive than end-users in developed markets. Furthermore, in North America, end-users prefer suppliers who offer value-added services such as chemical management services, while value-added services might not be a crucial factor in Asia with all customers (
see Figure 2).
Figure 2. Global general industrial oil and grease demand by region, 2017.
In terms of industries, demand for general industrial oils and grease is fragmented, with no industry accounting for more than 15% of total consumption. General manufacturing, primary metals, mining, transportation-equipment manufacturing and power generation are the five largest industries consuming general industrial oils and grease. Other industries, such as chemicals, oil and gas, cement and off-highway transportation, have small but significant consumption of general industrial oils and grease.
Lubricant consumption patterns vary by industry. For example, turbine and circulating oils are the most important lubricant for power generation, accounting for more than 45% share in the total consumption of general industrial oils and grease in this industry. Hydraulic fluids are the leading lubricant product for mining, primary metals, general manufacturing and transport-equipment manufacturing, accounting for about 45%-80% of the total consumption in these industries. Similarly, compressor and refrigeration fluids are more important for the food and beverage and electrical equipment manufacturing industries.
In terms of supply, the market is fragmented, with only two suppliers—Shell and ExxonMobil—having more than 10% market share each in the global market. Furthermore, the top 10 suppliers account for only a little more than a 50% share in the global market. Other important suppliers in the market are Chevron, BP, Sinopec, Total, PetroChina, Petrobras and Lukoil.
Generally, developing markets are less fragmented than developed markets, with the top 10 suppliers accounting for more than two-thirds of the market in the Asia-Pacific region, South America, Africa and the Middle East. In contrast, in a developed market like North America, the top 10 suppliers control less than 50% of the market. The high level of consolidation in developing markets is because of the presence of national oil companies. For example, IOCL, HPCL and BPCL lead in India; Sinopec and PetroChina in China; Petrobras and Ipiranga in Brazil; Engen in South Africa; and Petromin in Saudi Arabia.
The Asia-Pacific region will remain the largest consumer of general industrial oils and grease through 2021.
© Can Stock Photo / Harlekino
Market trends
General industrial oils and greases are impacted by product trends that operate across all industries as well as by trends specific to each industry.
There are three key product trends common to all industries:
1.
increasing usage of high-performance lubricants, such as synthetics
2.
modernization of equipment across industries, which in turn drives usage of higher quality lubricants
3.
increasing adoption of recycling or fluid-management practices.
These trends are expected to have an adverse impact on the volume growth for general industrial oils and grease across all industries globally but might not impact value growth.
Currently growth in the usage of synthetics is the most prominent trend in the industry. It is driven by various factors such as increasingly extreme operating conditions, safety considerations, equipment modernization and OEM recommendations and the appreciation of the benefits of using synthetics in certain situations by end-users. For example, in the wind power industry, especially off-shore wind turbines, there is a need to increase the reliability of the gearbox as well as increase drain intervals to overcome the difficulty in accessing the turbines due to poor weather conditions or their remote location. As a result, the usage of synthetics is growing in this industry.
Equipment modernization also is leading to increased usage of synthetics. For example, new hydraulic equipment coming in the market have smaller reservoirs. Due to the reduction in fluid volume with respect to pump flow rate, the time available for the fluid to cool and for entrapped air to escape has reduced. Moreover, such systems experience high temperature and pressure. Under such extreme conditions, mineral oil-based products tend to break down, resulting in the precipitation of contaminants. Therefore, end-users are moving toward synthetics with longer drain intervals that can operate under such extreme conditions.
Penetration of synthetic products is higher for compressor and refrigeration oils compared to other general industrial oils, mainly due to OEM recommendations. In the case of compressor oils, OEMs provide extended warranty for compressors for 6-10 years or provide total maintenance service for a fee. As a result, customers use synthetic compressor oils for the warranty period. Many customers, having realized the cost-performance benefit of synthetics, continue to use these products in out-of-warranty compressors.
Customers across industries also are looking for value-added services such as recycling or fluid-management practices, as it helps in extending the drain interval, therefore reducing the demand for lubricant. Currently customers in developed markets are more open to using such services.
There also is increased usage of Group II base stocks to formulate general industrial oils and grease, especially in North America. Lubricant suppliers in the Asia-Pacific region also have started using Group II base stocks to formulate these lubricants. Moreover, in North America lubricant suppliers also have started using Group III base stocks in a limited fashion to formulate these lubricants. This trend also is expected to have an adverse impact on growth in the volume demand for general industrial oils and grease, as the lubricants formulated using Group II and Group III base stocks are expected to have longer drain intervals.
Industry trends only affect an industry or region and, thus, vary from one industry to another or from one region to another. For example, in mining, coal mining is declining as power generation shifts toward natural gas and as excess capacity for primary metals manufacturing, including steel manufacturing, is shut down, especially in China. Since coal mining accounts for the major part of the mining industry, any decline in coal mining will have a negative impact on general industrial oil and grease demand in the industry. Similarly, as excess capacity for primary metals manufacturing is shut down, the demand for general industrial oils and grease is expected to decline in this industry.
Another example of an emerging industry trend is the expected growth in demand for new aircrafts as air traffic grows, leading to increased demand for general industrial oils in both the off-highway transportation industry and the transportation equipment manufacturing industry. Air traffic is expected to increase, mainly driven by China and India, where passenger traffic is expected to grow at an average rate of 10% and 20% per year, respectively. Similarly, in the general manufacturing industry, manufacturing activity is moving back to the U.S. due to several factors. This will support growth in demand of general industrial oils and grease in the U.S. At the same time, increase in the usage of new processes, such as high-speed cutting, laser cutting and electrical discharge machining, is expected to lead to a decline in lubricant demand in the general manufacturing industry.
Outlook
The forecast for the general industrial oils and grease demand depends on five key factors:
1.
global economic growth
2.
performance of various industries
3.
equipment modernization and adoption of new technologies
4.
lubrication practices such as increased usage of better quality lubricants and automatic lubrication methods, especially for grease
5.
increased adoption of value-added services such as recycling or fluid-management services.
All the factors, with the exception of global economic growth and the positive performance of some industries, will have a negative impact on demand for general industrial oils and grease. As a result, demand for general industrial oils is expected to be essentially flat with growth of 0.2% until 2021 (
see Figure 3).
Figure 3. Forecast annual growth rates of general industrial oils and grease, 2017 to 2021.
Refrigeration oils and turbine and circulating oils are expected to be the two fastest-growing general industrial oils. Demand for refrigeration oils will grow, mainly as the production of intelligent air conditioner and refrigerators that consume less oil and electricity is expected to boom in China.
Second, in Europe use of air-conditioning and refrigeration systems for both residential and commercial purposes is growing, leading to increased demand for refrigeration oils. Turbine and circulating oils demand is expected to grow, as demand for electricity grows around the world, especially in developing regions. All other general industrial oils, such as hydraulic fluids, industrial gear oils and compressor oils, also are expected to witness minor growth. However, demand for grease is expected to decline, as demand from primary metals and mining, two of the largest grease consuming industries, decline. Increasing use of better quality greases and better greasing techniques to prevent over-greasing also is expected to lead to a decline in grease demand globally.
Moreover, mineral oil-based lubricants for all general industrial oils and grease are expected to either decline or show minor growth. Decline is expected for compressor and refrigeration oils and grease, while hydraulic fluids, industrial gear oils and turbine and circulating oils are expected to show negligible growth. On the other hand, synthetic lubricants for all general industrial oils and grease are expected to grow at a much faster rate due to the trends discussed earlier. However, mineral oil-based lubricants will continue to dominate this industry for the foreseeable future.
In terms of regions, South America, Africa and the Middle East are expected to grow the fastest but from a low base. Major economies, such as Brazil in South America and Saudi Arabia in the Middle East, are expected to drive this growth. Brazil is currently recovering from the recession it faced in 2015 and 2016, which will lead to growth in demand for general industrial oils and grease in the future. Saudi Arabia is investing to develop manufacturing industries, which will lead to higher lubricants consumption.
Demand is expected to decline in the Asia-Pacific region as it declines in China and Japan. However, other countries in the region are expected to show growth. Furthermore, the Asia-Pacific region will remain the largest consumer of general industrial oils and grease during the forecast period. Demand also is expected to decline in North America, as demand declines in the U.S. as end-users increasingly adopt better quality oils and fluid-management services. However, reshoring to the U.S. is expected to nullify this decline to some extent.
Conclusion
The general industrial oils and grease market seems a stable market, offering little growth opportunities; however, this is not so if the market is seen as a combination of different products, regions and industries. For example, demand for general industrial oils and grease is expected to decline in the primary metals industry; however, it is mainly due to a decline in a few country markets such as China. Markets such as India are expected to show growth in demand for this industry.
Furthermore, there are three strong trends seen in this market, and suppliers who are positioned to take advantage of them can gain a strong position in this market. These trends include growth in synthetics consumption, equipment modernization and increased adoption of value-added services such as recycling or fluid-management practices. Suppliers who have a well-established synthetics product portfolio, have close tie-ups with OEMs to develop oils that are compatible with the new equipment and offer fluid-management services, will have an advantage.
Kunal Mahajan is a project manager at Kline & Co. in the Energy practice. You can reach him at Kunal.Mahajan@KlineGroup.com.
Kline is an international provider of world-class consulting services and high-quality market intelligence for industries including lubricants and chemicals. Learn more at www.klinegroup.com.