Introduction
With Europe becoming a hotspot for the spread of the COVID-19 pandemic, how will the economic, social, and political fallout from the public health emergency affect the continent’s lubricant markets? Continuing Kline’s series of articles exploring the impact of COVID-19 on the global lubricants industry, this article seeks to examine the effects of the pandemic in Europe by analyzing the repercussions on lubricant demand in the five key European countries which have been the most affected.
Background
Together, the lubricant markets of Germany, the United Kingdom, France, Italy, and Spain amount to an estimated 3 million tonnes (MT) in 2019, equivalent to 8% of global lubricant demand (nearly 50% of the total lubricant demand in Europe). Industrial oils and fluids form the majority of lubricants consumed in these countries, accounting for almost 60% of total demand, followed by consumer automotive lubricants and commercial automotive, with 20% each.
The sudden outbreak of COVID-19 has substantially exacerbated the already sluggish lubricant demand projections for these top-five Western European countries. Collectively, pre-COVID-19 lubricant demand growth was expected to remain flat at best over the next 10 years, although displaying remarkable disparities between a vital German lubricant market, compared to low-growth lubricants markets in Spain, and Italy.
An Unprecedented Health Crisis
All these countries have reported high numbers of infections and severe disruptions to economic activity linked to the spread of the disease. As in other parts of the world, their governments have introduced emergency legislation imposing limitations on business activities and social gatherings, although the extent of the clampdown varies from country to country.
Italy has been the earliest affected state, and consequently, the package of measures introduced in this country has been the most severe. Citizens and residents are not allowed to travel more than 200 meters from their residence unless traveling for work, for resupplying basic necessities, or on medical grounds. These all must be done in the commune of residence, which residents are not allowed to leave. Police up and down the country regularly challenge drivers and pedestrians, checking the written certificates which must be compiled and signed to formally state the reason of the trip and issuing hefty fines on those found to have transgressed. At the same time, swaths of businesses have been closed. France has followed a similar path.
On the other end of the spectrum, the United Kingdom’s response was delayed and more incremental, with gradual increases of restrictions over time. Public venues, schools, and most retailers are closed, but many businesses are still allowed to continue.
Confinement Measures and Their Implications
To quantitatively assess the impact of COVID-19 on volumetric lubricants demand in 2020, Kline has taken into account the different measures governments have taken and how they would translate into aggregated demand for lubricants across the five countries and three market segments (industrial lubricants, commercial vehicles lubricant (CVL), and passenger vehicles (PVL). In addition, we have also considered the varying lengths of time during which the strictest measures (the “clampdown”) are going to remain in force, the more indirect social effects these are having for consumers and businesses, and the measures taken by governments, central banks, and international institutions to support the economy at this critical moment.
Expected Duration of Confinement Rules in Select European Countries
As per Kline’ view, the 2020 finished lubricant market in Italy and Germany will be the hardest hit by the consequences of COVID-19.
Strict confinement measures will most likely pass a heavy toll on 2020 demand of the PVL segment across all five European countries. The contraction United Kingdom’s PVL market is expected to be less pronounced than other peer countries in the region, due to less drastic anti-pandemic measures adopted by the U.K. government (at least during the early stage of the COVID-19 pandemic in the country). Conversely, the negative effect on the CVL segment will be less pronounced, as this is a key segment ensuring continuity of essential transport of goods and services comprising light, medium (LD/MD), and heavy-duty (HD) commercial fleets as well as off-highway mobile equipment used in agriculture.
Light and medium-duty commercial fleets operating in distribution, e-commerce, and urban logistics, and lately in mobile healthcare services, are expected to work at close to full capacity. Private fleets and taxi fleets have a much lower utilization rate, as a large segment of the population is working from home.
The industrial lubricant demand in Europe will witness major falls driven by the temporary shutdown of facilities across the automotive industry in the continent.
Estimated Finished Lubricants Stage 2 Demand Contraction by Sector in Select European Countries, 2020
Passenger Vehicle Lubricant Segment
Most lubricants for passenger vehicles in Europe are sold through the installed channel—essentially, workshops, either franchised or independent, which perform oil changes on behalf of their clients. Workshops are among the few businesses permitted to remain open, as they offer an essential service. However, some regional governments in Germany—for example, in Bavaria—have prohibited them from operating at full service.
The lockdown has resulted in a severe reduction in the use of passenger vehicles and motorcycles for personal mobility. In France and Italy, motorists are not allowed to leave their communes of residence. Consequently, fewer motorists are in need of changing or topping up the oil for their vehicles and face many logistical challenges if they choose to do so. Many workshops have chosen to close in the face of depressed demand; others have elected to remain open only for emergency repairs, which may or may not include oil changes, or only for servicing vehicles of the emergency services (ambulances, fire brigade, police etc.).
Deadlines for annual vehicle checks have been extended in many European countries, encouraging motorists not to drive into their workshops, which typically pair oil changes with their annual package of maintenance checks. Non-essential operations such as changing gear oils or automatic transmission fluids (ATFs)—unless urgent—are expected to be postponed. Demand for oil from fuel stations and other establishments such as quick lubes is marginal and expected to remain this way.
In the retail channel, mass merchandisers that sell lubricants have not been considerably affected, while auto parts stores remain mostly open, albeit with reduced service. They tend to sell PCMO directly to consumers who use it mostly for top-ups. Since stocks of spare parts imported from China are also low since the beginning of the crisis there, many auto parts stores—for example, in France—have chosen to close. In the United Kingdom, lubricant sales to supermarkets are reportedly following a V-shaped pattern. In the weeks of panic-buying at the beginning of the emergency, lubricant sales slumped as supermarkets’ over-stretched supply chains focused on procuring essentials and neglected lubricants. In the subsequent weeks, however, lubricant sales to retailers have partially rebounded as supermarkets have put in orders to restock on lubricants.
Factory fill accounts for approximately less than 10% of lubricant consumption in Europe. Large European OEMs, including Volkswagen, FCA (Fiat Chrysler Automobiles), and Daimler, have chosen to close their factories during the lockdown period. Since most automotive assembly lines are shut down and sales of new vehicles are plummeting, factory fill volumes are close to zero.
Kline envisages demand for passenger vehicle lubricants has shrunk to just over one-third of normal due to the clampdown period. COVID-19 could bring some change to lubrication in the consumer segment, which may well affect demand after the end of the clampdown. In the face of reduced workshop service, some motorists will choose to perform the oil change themselves or rely on more regular top-ups. However, with the scope of using their vehicles so drastically reduced, lubrication requirements are not going to be seen as a top priority, with some motorists also choosing to stretch the period between oil changes for budgetary reasons, due to financial instability. Further down the time horizon, as consumers hesitate to purchase a new vehicle, leading to a gradual aging of existing vehicle fleets, there could be increased demand for maintenance and repair services, including more frequent oil drain intervals.
Estimated PVL Stage 2 Demand Contraction by Sector in Select European Countries, 2020
Commercial Vehicle Lubricant Segment
Demand for CVLs on the on-highway segment in Europe is expected to shrink but to a lesser extent than the fall registered in the consumer segment. With sea-imported freight falling by 20%, the fall in demand from industry is going to be partly counterbalanced by the vertiginous growth in demand from e-commerce since the pandemic reached the continent. As retailers are forced to close, more people are turning toward online shopping. The trend toward e-commerce and the growth of online deliveries at the expense of in-store purchases were well underway before the COVID-19 outbreak began; both have been reinforced by shop closures and, when shops are open, by the reluctance of consumers to frequent crowded places. In Italy, where e-commerce had struggled to gain a toehold in the grocery space, online orders shot up by 80% at the beginning of the outbreak, a period between the January end and early February. There are also increases in demand for transporting medical and essential supplies, with mass merchandisers’ supply chains working at full throttle. There are reports that the supply chain infrastructure is struggling to keep up with demand. Demand from heavy duty (HD) vehicle fleets and light and medium duty (LD/MD) commercial fleets by logistics fleet is expected to remain relatively strong.
Transportation, however, is likely to be profoundly affected. Demand for public transport has plummeted. With severe limits on mobility in place, buses and other forms of public transport are operating at one-third of regular service levels, with utilization measured in some cities below 10%. The situation for private transportation is even worse. Tourism is an important source of revenue for these countries, especially for Italy and Spain. Coaches and vans used to ferry tourists make up a significant portion of the transportation fleet; they are now lying idle in their parking lots, the companies owning or leasing them on the verge of bankruptcy.
In the off-highway segment, demand for lubricants used in agriculture and by the public sector is expected to remain constant. However, maintenance activities are deferred, with stretched supply chain for spare parts. Many service centers tied to agricultural machinery dealerships are closed, making oil changes more difficult.
Demand from construction, instead, varies across Europe. In Italy, all construction work on residential and commercial projects has been stopped by law, with only civil engineering works permitted to continue. Construction workers are further hindered by the inability to cross commune boundaries. In the United Kingdom, instead, construction projects are allowed to continue, with the only limitations tied to the health and safety of workers. Reportedly, construction sites operating in Britain are working at 80% capacity as of early April, while in France, that figure shrinks to 20%. Investor appetite is low, so there are fewer prospects of new sites opening; furthermore, workers experience difficulties in respecting mandatory guidelines on keeping two meters of distance from each other while working on the site. The crisis in construction impacts lubricant demand from mining. In Germany and Spain, most mines have been shut down.
Similarly, to passenger vehicles, the manufacturing of commercial vehicles has been mostly stopped, resulting in much lower volumes of factory fill. A coalition of European associations in the automotive industry has urged European Union’s authorities to postpone CO2 targets on fleet emissions. Demand for CVLs—for both on-highway and off-highway segments—is expected to shrink to about two-thirds of regular volumes during the clampdown period.
Estimated CVL Stage 2 Demand Contraction by Sector in Select European Countries, 2020
Industrial Lubricant Segment
The industrial segment in these countries accounts for about 60% of the total finished lubricant market. The transportation equipment manufacturing, machinery, primary metals, chemicals, and power generation industries lead the industrial segment in Europe.
The outbreak of COVID-19 represents an unprecedented disruption of Europe’s supply chain due to restrictions in the mobility of people and goods. Given the diversity of Europe, the negative effects of the pandemic and the resulting health, social, and economic crisis will vary greatly across industrial sectors and countries. While few sectors like food and beverage, chemicals, and pharmaceutical will continue to operate at near business-as-usual utilization rates, most industrial activities—particularly those connected to automotive sectors and its auto-component subsector—will witness large falls in output, resulting in lower demand for industrial lubricants.
The Most Affected Industrial Sectors
Europe is home to some of the leading global players operating in the transportation equipment manufacturing, including Airbus in the aerospace industry, as well as vehicle manufacturers such as VW, PSA, Renault, Daimler, Fiat, and BMW. The automotive industry plays a crucial role in European economies, and this sector is one of the most severely affected by C-19. Supply chain disruption and workers' health concerns have forced leading OEMs in Europe to suspend production temporarily at a number of manufacturing sites. Not only production disruption but also plummeting sales are adding pressure to European automakers. Due to mobility restrictions, consumers are more hesitant to buy a new car.
The transportation equipment manufacturing sector represents about one-third of the total industrial lubricant demand in select countries and includes metalworking fluids, hydraulic fluids, industrial engine oils, among others. Therefore, lubricant demand in this segment is anticipated to shrink during the shutdown period. Moreover, the temporary halt of production had a domino effect in the entire auto-component supply chain, with a number of companies supplying fabricated metal goods and primary metals, as well as tire manufacturers and machinery producers following the same path and opting for the temporary closure of facilities. Therefore, demand for industrial lubricants used in these applications, notably rubber process oils, are consequently purported to fall.
Resilient Industrial Sectors
Despite a rather bleak picture across the whole European industrial segment, a few bright spots can be identified—for instance, food grade lubricants used in the food processing industry, medicinal white oils used in the chemicals for pharmaceutical products, and other niches will continue to show semi-regular demand patterns.
Overall, Europe’s power generation and electricity transmission is operating at decreased capacity, primarily due to the temporary closure of facilities in the commercial and industrial segments. However, this decline was partly offset by increased demand in the residential segment, as most companies in Europe have embraced remote working policies in adherence to stay-at-home governmental mandates.
In the long run, demand for lubricants used in power generation, notably transformer oils, is expected to recover as electricity demand in the commercial and industrial segments reactivates. Potentially, there will be an incremented electricity demand post-COVID-19, assuming that “home office” policies will become a standard for a sizeable number of companies in an effort to avoid second waves of infection.
Based on Kline’s industry understanding, demand for industrial lubricants is anticipated to be about 40% of usual demand during the clampdown period.
Estimated Industrial Lubricant Stage 2 Demand Contraction by Sector in Select European Countries, 2020
Summary
Before the outbreak of the COVID-19 pandemic, Kline’s projections showed a stagnating lubricant market in the top-five leading countries in Europe. Despite nearly zero volumetric growth, another picture can be seen value-wise. Europe’s lubricant market is at the forefront in the increasing usage of superior quality, top-performing lubricant products.
Demand for synthetic lubricants in Europe is driven by a large end-use segment comprising medium-sized, highly specialized manufacturing enterprises. Pre-COVID-19, several disrupting forces such as e-mobility, 3-D printing, minimal quality lubrication, and strict emission regulations were progressively shaping the lubricants consumption pattern in Europe. Consequently, it is foreseeable that the spread of COVID-19 will just accelerate this ongoing transformation.
Certainly, 2020 will be a difficult year for the European lubricant market. The degree of damage inflicted on the market will depend on the length of the confinement and social distancing measures, while the pace of recovery will heavily depend on how effectively financial resources are mobilized to reactivate the economy at national and European Union levels.
We analyzed three scenarios with differing assumptions on length and severity of lockdown and developed market demand estimates under these scenarios.
Based on the three scenarios examined, the overall lubricant consumption in the five leading European markets in 2020 could decline between 15% and 30% in comparison to 2019, a drop of between 500 kilotonnes and 1,000 kilotonnes.
Estimated Lubricant Demand Growth in Select European Countries, 2019 to 2020
| Europe Lubricant Demand Scenarios | |
|---|---|
| Scenario 1 | 8-week lockdown, slow but full recovery thereafter |
| Scenario 2 | 10-week lockdown, slow and partial recovery thereafter |
| Scenario 3 | 12-week lockdown, slow and partial recovery thereafter |
Lastly, the sudden spread of the COVID-19 pandemic could have far-reaching implications for the economy and subsequently having an impact on finished lubricants, as it revealed the vulnerability and risk associated with a globalized supply chain. It can be expected that industry players are already assessing various risk-mitigation options through diversification of supply sources. In light of these events, industry watchers are predicting the emergence of a de-globalization process. Major European multinationals may opt to “re-shore” strategic manufacturing activities back to Europe, restoring demand for some of the lubricant products that have been particularly affected in the past by the previous relocation of manufacturing activities out of Europe, including metalworking fluids and hydraulic fluids.
In the next installment of the Kline Energy Practice’s analysis of the impact of COVID-19 on the global lubricant industry, we will be presenting our insight and perspective on the global basestocks industry.
Sharbel Luzuriaga is a Project Manager; Max Marioni is a Senior Analyst in the Market Research division of Kline’s Energy Practice. Both are based in the Prague, Czech Republic office.
This article was created with the contribution of Kline’s European team: Gabriel Tarle, Simon Perche, and Pablo Ladron De Guevara.
