In a presentation at the ICIS Pan-American Conference held in December 2016, Sergio Rebelo, Managing Director in Kline’s South America affiliate, Factor, discussed the struggles and opportunities of the South American finished lubricants market.
South America has a population of 419 million and a continental GDP of USD 3.6 trillion, roughly 5% of the global total. The top countries in terms of GDP are Brazil, Argentina, and Colombia. Nonetheless, the region is undoubtedly experiencing a challenging economic climate. Projected growth has been cut in half since 2010 and is forecast to grow 2.5% per annum until 2020.
Most of the last decade of China’s energy output has pushed commodities up and helped secure growth in South American countries. However, as growth in China has slowed in recent years, commodity prices and currencies in South America have been adversely affected. Because of these economic struggles, a political shift towards more conservative economic principles is evident in most of the leading countries over the region.
The South American finished lubricants market is currently at about 2.4 MT. The leading applications in the region are heavy duty motor oils, passenger car motor oils, and process oils. It must be noted that over 60% of the market is driven by automotive lubricants. Brazil leads finished lubricant demand, holding over 50% of the share.
Brazil is contending the deepest and longest recession ever. GDP has declined in 2015 and 2016 at a rate of over 3%. The economy is experiencing near double-digit inflation and unemployment. This has adversely affected several markets, including production, manufacturing, and, notably, the finished lubricants segment, which has declined by about 15% since its 2013 peak.
However, long-term perspectives for the region remain attractive. All over the region, inflation is expected to decrease and GDPs are expected to grow in 2017 as opposed to the negative rates in recent years for the major markets. Overall, South America is expected to present sustainable growth, price stability, and lower interest rates in the medium-term. As the economy recovers, the “motorization rate” is expected to increase in the region. Currently, the region lags (significantly) behind Europe and the United States as far as the number of vehicles per inhabitants is concerned.
Moreover, engine downsizing and fuel economy standards will force a shift in the market towards synthetic and semi-synthetic lubricants. OEMs in the region do follow international trends, and similar legislation and CO2 emission reductions are driving the vehicle parc towards more efficient engines and value-added lubricants. A majority of the volume added to the market until 2020 will be synthetic and semi-synthetic. This shift towards “quality” will cause an increase in the demand for API Group II and Group III basestocks. As a result, a relevant increase of Group II and Group III basestock imports for the region is expected in the upcoming years, once no additional basestock capacity is expected to be added in the region in the next three to five years.
South America’s reliance on basestock imports is quite defined, with North America for Group II and Europe for Group I. North America already has surplus Group II capacity. With its own Group II demand growing at a slow rate, the region is well placed to cater to the growing Group II demand in South America. Group II capacity is growing in Europe as well. The capacity growth is more than the expected Group II demand growth in Europe. As a region, Europe could potentially grow as a Group II supplier to the South American region when the Group II supply base grows.
All in all, we expect the main factors affecting the attractiveness of the South American lubricants industry will improve over the next five years. Growth will return, but in a softer way. Prices will increase as a result of a better quality product mix (synthetics). Feedstocks are not expected to grow significantly nor will local currencies face severe (additional) devaluations. Lastly, the cost of capital will be lessened due to lower inflation and interest rates. The way these factors will impact each of the countries of the region will certainly differ. As of today, we cluster the countries of the region into three major groups as far as value creation is concerned, and, for each of them, there are opportunities and threats to be faced.
These findings are available in the recently published Opportunities in Lubricants: Latin America and Caribbean Market Analysis report.
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