The Impact of COVID-19 on the Finished Lubricants Industry in Brazil

The Impact of COVID-19 on the Finished Lubricants Industry in Brazil


impact of Covid 19 on Brazilian lubricants marketIntroduction

This article aims to address the impact of COVID-19 on automotive and industrial lubricants market in Brazil. Our analysis was conducted on each sector of the lubricants industry and considers three scenarios based on the duration for total lockdown or partial social distancing in the different sectors of the economy in Brazil. Considering that this crisis is still progressing and policies and information change daily, if not every hour, the results of the scenarios will be updated according to any change in facts.

Context

Brazil is the sixth-largest lubricants market in the world with more than 3% of global demand in 2019, behind the United States, China, India, Russia, and Japan.

Brazil consumed more than 1.25 million tonnes (MT) of automotive and industrial lubricants in 2019; pre-C-19, projected demand growth was between 1.5% and 2.0% per year over the next 10 years. The pre-C-19 forecast was based on a scenario of economic recovery in the country after two years of deep recession in 2015 and 2016, in continuity with a slow recovery started in 2017. The economic recovery was driving the renewal of the automotive fleet, a factor that was absent during the recession. The economic recovery was also driving increased usage of the automotive fleet and a recovery of industrial activity. On the other hand, factors such as an increase in the use of better-quality lubricants, such as semi-synthetic and synthetic with lower viscosity; modern-designed engines and other automotive parts; and the improvement in maintenance practice (both in the automotive and industrial sectors) were lengthening the interval between lubricant changes. The net impact of these factors, pre-COVID-19, was expected to generate volumetric growth between 1.5% and 2.0% per year. In addition, the value of the industry was expected to grow above this range, as the product mix became progressively more premium, more synthetic, of lower viscosity and of better quality—and therefore, with a higher added value.

Brazil’s Response to COVID-19

The number of COVID-19 cases registered in Brazil (more then 584,000 cases have been confirmed in the country on June 3rd) represents 2,752 cases per million inhabitants, triple the global average of 846 cases per million. The geographical distance and time lag in the onset of the crisis in the country allowed Brazil to initiate the policy of social distancing at earlier stages of the pandemic based on the experience of European countries. However, the approach of winter has intensified the occurrence of new cases and makes it clear that the peak of the pandemic is yet to come.

On March 20, the Brazilian State recognized a “State of Public Calamity” due to the pandemic, allowing budgetary flexibility and triggering a series of protective measures by regional and local governments. Among these measures, those related to social distancing stand out. They include the suspension of face-to-face classes in the entire public and private school system; suspension of religious services in addition to activities considered non-essential, such as artistic events, concerts and sporting events; the closing of cinemas, theaters, museums and parks; and the closing of bars and restaurants, gyms, sports clubs, and shopping centers. The exceptions are food and medicine distribution networks and stores, as well as fuel service stations.

The Brazilian government decided to provide resources to the health sector, amounting to approximately USD 10 billion (BRL 50 billion), to fight the epidemic. This included the purchase of test materials, the purchase of personal protective equipment (PPE), and the purchase of respirators, among other things.

For citizens, the government provided emergency resources directed specifically toward informal and low-income workers. These included a monthly payment of USD 120.00 per worker for a period of three months; USD 200 million in resources for the payment of electricity bills for low-income citizens; advance payment of the 13th salary for retirees (an additional salary that is normally paid in December); and subsidized personal credit from government-controlled banks.

For companies, subsidized credit lines were made available by government-controlled banks mainly to finance working capital (such as paying employees and suppliers but not exclusively), in addition to the postponement of tax payments and resources for payment of wages to infected workers for 15 days. The government also allowed flexibility of labor legislation to allow a reduction in working hours and a partial reduction in wages to avoid dismissals. In return, companies receiving benefits are committed to not making layoffs to adjust costs.

Social distancing has severely impacted the informal sector of the economy, although the initiatives listed above, if properly implemented, will help control the impact on this sector and preserve people’s livelihood to some extent. On another front, the measures are aimed at preserving formal jobs. In any case, the impact on the economy is estimated at a 6% contraction in GDP for 2020.

Approach and Analysis

In order to estimate the quantitative impact of the C-19 pandemic on the lubricants volumetric demand  in Brazil in 2020,  our assumption is that the C-19 crisis will affect each segment and sector differently and thus its ability to operate as normal as possible in 2020.

The methodology essentially analyzes four stages of the C-19 crisis in 2020:

  • Stage 1 or Pre-Crisis
  • Stage 2 or Lockdown
  • Stage 3 or Recovery
  • Stage 4 or Post-Crisis

Depending on the stage 2 and 3 duration in number of weeks and the degree of recovery of demand for lubricants in stage 4, three different scenarios have been developed that generate a range of views on the downturn in the automotive and industrial lubricants market in Brazil that can be expected in 2020.

In Brazil, the impact on the lubricants industry comes from two main drivers, both reducing demand:

  1. The policy of social distancing—detailed above—resulted in a profound reduction in urban mobility and vehicle use. Consequently, this caused a decrease in the consumption of fuels and lubricants—in this case, predominantly impacting passenger vehicles.
  2. The sudden reversal of expectations regarding the performance of the economy, growth prospects, and job offers generates a level of uncertainty among consumers and industry managers that primarily impacts the durable goods sectors—automotive and white goods—impacting the course of recovery in the use of installed industrial capacity. This, in turn, impacted the consumption of industrial lubricants. The goods transport sector was also affected, disturbing the demand for automotive lubricants in the commercial vehicle segment.

Our expectations indicate a period equivalent to between seven and eight weeks for social distancing across the country and a period between 13 and 14 weeks for recovery to normal activities. Therefore, these scenarios were constructed:

Scenarios - Stages Duration in Weeks

Stage 1 – Pre C-19 Stage 2 – “Lockdown” Stage 3 – Recovery Stage  4 – Post-crisis
Scenario 1 12 7 13 20
Scenario 2 12 8 13 19
Scenario 3 12 8 14 18

Based on our knowledge of automotive and industrial sector dynamics, we estimate the negative impact of the C-19 crisis on the operational levels in each of the 32 sectors relevant to the consumption of automotive and industrial lubricants in Brazil and thus produce three different scenarios for demand retraction in 2020.

Lubricants for Passenger Vehicles

The lubricants consumer for private passenger vehicles (PVL) in Brazil primarily has a “do-it-for-me” profile, and independent workshops and service stations represent more than 50% of the demand in the PVL segment.

Estimated Operating Level by Lubricant Distribution Channel for the PVL Sector During Stage 2’s Lockdown

private passenger vehicles (PVL) lubricants in Brazil

Distribution channels suffered different impacts due to the implementation of social distancing.

  1. Service/fuel stations are considered an essential service and are therefore operating as defined by ANP-National Oil Agency for at least six days a week, 12 hours a day.
  2. Independent workshops and quick lubes are not regulated but are operating aligned with existing demand.
  3. In many cases, vehicle franchise dealers have closed their doors, since sales of new vehicles dropped by around 75% between February and April; franchised workshops are also operating with limitations.
  4. Supermarkets and hypermarkets are working normally.
  5. Auto parts stores are operating in line with existing demand.

The main impact of social distancing on the PVL lubricants market comes from the suspension of face-to-face classes and non-essential activities. This measure, inevitable in the context of the pandemic, caused an estimated reduction of more than 60% in fuel consumption between February and April (April data is not yet official). The correlation between vehicle use, fuel consumption, and lubricant consumption is strong and more impactful in the case of lubricants, since the oil drain and change can be marginally postponed without significant damage, as opposed to fuel supply.

Thus, the channels that are regulated to be functioning—service stations and supermarkets— suffered less, and the unregulated channels that adjust to demand have had, until now, a reduction in business of around 50%. The “factory-fill” significantly decreased with the sale of new vehicles—with an approximate reduction of 75%—in this period of social distancing. In this context, we estimate the reduction in PVL demand to be almost 50% during the period of social detachment; the return to normalization may see demand return to 80% and 90% of the pre-crisis level. The legacy of the work-from-home practice and usage of virtual transaction channels will likely be permanent, leading to a less-than-full recovery. This will result in a PVL demand reduction of between 16% and 22% in 2020 in relation to the demand verified in 2019.

Commercial Vehicle Lubricants

The commercial vehicle lubricant (CVL) market in Brazil is more than 80% dedicated to highway vehicles and less than 20% to off-road equipment. This segment is much less impacted by the “stay-at-home” social distancing policy than the PVL sector, since the transport of products specially dedicated to supplying urban regions—as well as the movement of products for export—remains essential.

Estimated Operating Level by Lubricant Distribution Channel for the CVL Sector During Stage 2’s Social Distancing

commercial vehicle lubricant (CVL) market in Brazil

As observed in the PVL segment, in the case of commercial vehicles, the expected impact is differentiated by sector.

  1. The most impacted segments are related to passenger transport such as bus fleets and vehicle rental, which represent almost 25% of CVL consumption and should have activities reduced to less than half of their normal level.
  2. Sectors related to cargo transportation—carriers and private fleets of companies contracted to transport products that represent around 55% of CVL demand—are expected to suffer demand contraction, losing  30% to 40% on average in the period of social distancing, especially supported by urban supply and exports logistics.
  3. In the case of off-road, the mining and construction sectors should experience a similar impact, losing 30% to 40% of expected demand.
  1. Construction due to the cooling of consumer and business confidence, reducing the demand for new investments
  2. Mining due to retraction in sectors aimed at the domestic market such as aluminum, cement, and iron ore supply to local steelmakers4. Agriculture, about 6% of the volume of CVL, should be the least-impacted sector since it is essentially defined by external demand, and the level of activity is already defined by the 2019 crop area. Impact on the next harvest depends on international expectations for 2021, which in general are expected to recover to pre-C19 activity level. In agriculture, the estimated retraction is limited to about 10% on the expected demand level in the period of mobility restriction.In such context, lubricant manufacturers must intensify their efforts to provide services and technical support to maximize the utilization of the fleet and reduce maintenance costs to retain customers.For the CVL sector, a decline in lubricant consumption of almost 40% is expected during the period of social detachment. The return to normalization should recover between 85% and 95% of the pre-crisis demand level due to the reduction in economic activity that is expected to continue impacting the sector at least until the end of 2020. As a result, the estimated decrease in demand for lubricants for the commercial vehicle sector in 2020 ranges from 10% to 16% in relation to the volume verified in 2019.

Industrial lubricants

The demand for industrial lubricants (IND), including process oil, spread across 14 industry sectors, accounts for approximately 35% of the total 1.25 million tonnes finished lubricants market in Brazil in 2019.

Estimated Operating Level by Industry Sector During Stage 2’s Social Distancing

impact of Covid 19 on indsutrial lubricants market in Brazil

The four main sectors in terms of lubricants consumption in Brazil—plastics and rubber, offshore oil production, mining, and auto parts—account for more than 50% of industrial lubricants demand and are expected to lose 30% to 45% on the expected  level of demand.

  1. Plastics and rubber: This segment includes mainly hydraulic oil for plastic injection molding machines used in the production of parts and packaging for a number of sectors of the consumer industry, including food, beverages, auto parts, durable goods, and others and process oil for the production of rubber parts, especially tires and hoses for the automotive industry. This segment is greatly impacted by the reduction in the production of passenger vehicles and durable goods, which are quite sensitive to consumer confidence. The impact on this sector during the period of lockdown is estimated to be a 40%-45% reduction on the expected volume.
  2. Offshore oil and gas production: The oil industry is being hit hard by the C-19 crisis with a reduction of mobility and consumption of fuels. Such retraction is estimated at approximately 30% to 35%, impacting the consumption of inputs on platforms including lubricants for engines and generators. The estimated lubricants consumption retraction ranges between 30% and 35% in the weeks of social distancing.
  3. Mining: This sector is impacted by the reduction of the national industrial activity, especially the slowdown of the national steel industry. In addition, much of the iron ore produced in Brazil is exported, and its retraction is linked to the dynamics of the international market, especially China. The Chinese steel industry suffered a 12% retraction in February compared to the average level of 2019, but by March it already recovered by 5%. For minerals associated with construction, such as cement production, limestone, gravel, the impact is more significant. Since March, the activity level in the construction industry was 50% below the historical average and around 30% to 35% below the average in 2019. The estimated retraction in lubricants demand in the mining sector is expected to be between 30% and 35% in the weeks of the greatest mobility restriction.
  4. Auto parts: This sector was strongly impacted by the retraction in production and sale of new vehicles that declined from 70% to 75% between January and March 2020. As a result, the retraction in the consumption of lubricants in the auto parts sector is estimated to be 40%-50% in the mobility restriction period.

The sectors least impacted by the C-19 crisis are electricity, food, agriculture, and paper and cellulose, which represent approximately 25% of the consumption of industrial lubricants in Brazil.

  1. Electricity: The consumption of lubricants in the electric power industry is strongly related to process oil used in transformers that are driven by the energy capacity in the transmission and distribution networks instead of the energy consumption that suffers from the crisis. In this sector, the decline in lubricant consumption is estimated to be around 25% in the weeks of social distancing.
  2. Food: This is the least impacted sector since the supply side is being guaranteed, and access to distribution networks is also being provided. In addition, help to the low-income population aims to guarantee conditions to enable and sustain demand. The estimated impact on the consumption of lubricants in the food industry sector is between 10% and 15% in the period of movement restrictions.
  3. Agriculture: This sector has experienced limited impact since the harvest and planted area were defined in the pre-crisis period. However, crops in preparation for the next harvest are expected to have a negative impact on the demand for lubricants in the sector of approximately 20% to 25%.
  4. Paper and cellulose: This industry is strongly correlated to the international market, especially China, which has reacted to the crisis period with the demand for cleaning products such as paper towels, hygienic tissues, and other such products. The estimated decrease in lubricant consumption in this sector during the period of restrictions is around 20%.

Other sectors that represent about 20% to 25% of industrial lubricants consumption in Brazil—steel, metallurgy, chemicals, and capital goods—have an average retraction estimated at around 40% during the weeks of social distancing. Based on this analysis for the industrial lubricants segment, the estimated retraction in consumption ranges from 30% to 35% during the period of social detachment, and the return to normalization should occur at between 85% and 95% of the pre-crisis level due to the reduction in economic activity that is expected to continue impacting industry sectors until at least the end of 2020. As a result, the industrial lubricants segment is expected to suffer a retraction in demand of between 9% and 15% for 2020 in relation to the volume verified in 2019.

Conclusion

The consequences of the COVID-19 crisis are still undetermined, especially in the southern hemisphere, where the virus was detected about three months after its emergence in China, and initial actions on social distancing were adopted at earlier stages of the pandemic in comparison to countries in Europe and the United States. As the country enters the months of colder temperatures, with seasonal incidence of respiratory pathologies already higher than normal, the process of relaxing restrictions on mobility and contacts in the short term may be hindered.

Estimated Brazil Finished Lubricants Demand Growth, 2019 to 2020

impact of Covid 19 on lubricants market in Brazil

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Excipients Demand Forecasts with the COVID-19 Impact on Pharmaceutical Production

Excipients Demand Forecasts with the COVID-19 Impact on Pharmaceutical Production


COVID-19 Impact on Pharmaceutical Excipients ProductionIntroduction

As the COVID-19 pandemic spreads worldwide, the number of reported cases has exceeded 4.4 million as of as of this writing and continues to increase. The magnitude of the economic downturn that will follow is still highly uncertain, but consequences are bound to be significant across the globe.

In response to the health crisis created by the virus, pharmaceuticals and med-tech companies have been serving patients and creating solutions to improve public health. Med-tech companies have been focused on creating ways to rapidly and accurately diagnose COVID-19 through the development of molecular tests. Pharmaceutical companies have been starting clinical trials to validate antiviral drugs for treating COVID-19 and working around the clock to develop a vaccine. While these steps have an immediate impact on the pharmaceutical industry worldwide, long-term impacts are also expected to be seen across regional pharmaceutical industries.

Governments worldwide implemented quarantine and travel restrictions to curb the spread of COVID-19; however, such measures jeopardize industrial operations, including those of pharmaceuticals. Along with temporary production shutdowns in some countries, the pharmaceutical industry also faces severe consequences of supply chain disruptions. The global supply chain of medicines is under pressure because of a deficit of raw materials such as Active Pharmaceutical Ingredients (APIs) and excipients.

The demand increase for antiviral medicines is predictable in the short term, but there is an expected reduction in demand for medicines for other ailments. Reasons include the reluctance of patients with other conditions to visit medical facilities and pharmacies for prescribed medicines, along with the postponement of non-urgent medical procedures.

Global supply chain disruption 

The global pharmaceutical industry is dependent on China’s exports, as the country is the largest producer of pharmaceutical ingredients. With the COVID-19 outbreak in China and lockdown impositions, followed by international transportation restrictions, the raw material supply for pharmaceutical drug production from China slowed. This issue has the potential to disrupt pharmaceutical manufacturing in many countries, such as India, the United States, and Europe. A large share of the medicines sold in the United States is produced in China and India, while almost 80% of the United States’ API demand is met by these two countries. As one of the world's largest producers of generic medicines (producing 20% of global generics supply), India imports almost 70% of its APIs from China; therefore, disruption in its supply chain could result in drug supply shortages.

In anticipation of the shortages, governments and regulatory agencies have adopted temporary export restrictions, such as in the United Kingdom, where parallel exports of three drugs used for COVID-19 treatment were banned. India restricted the exports of 26 key drugs and APIs in the beginning of March 2020. This can have a significant impact, especially in the global supply of medicines such as paracetamol, antibiotics, and vitamins.

Global forecast for specialty excipients

According to our analysis, in the likely and best-case scenarios, the effects of disruptions on pharmaceutical production—and consequently on excipients demand caused by lockdowns and travel and transport bans across various countries—will be relatively short term. However, in the worst-case scenario, the supply disruptions due to extended lockdowns in various countries can have a more substantial impact on OSDF drug manufacturing and, in turn, significantly impact the demand growth of excipients globally.

Global Demand Specialty Excipients for OSDF Pharmaceuticals Forecast, 2019 - 2024

OSFDs excipients demand through 2024

Regional forecasts vary widely depending on factors such as country level lockdown length, travel and transport bans, the extent of COVID-19’s economic impact, and dependence on imports. For example, in India, although imports of pharmaceutical raw material from China resumed in mid-March, the current lockdown situation in the country has disrupted pharmaceutical production, as the ban on public transportation is making it difficult for workers to reach manufacturing plants. This is also disrupting the supply of packaging materials, among other essentials supporting the pharmaceutical industry. It is essential to study each region’s market of pharmaceutical excipients individually to fully understand the repercussions and better equip the strategies for different excipient markets globally.

Kline’s report on Specialty Excipients for Oral Solid Doses: Impact of COVID-19 on the Global Market provides insights into market forecasts in different regional markets in different scenarios.

Future changes in the industry

While in the short term, the pharmaceutical industry is expected to recover as the supply chain resumes, there are bound to be some long-term lessons. Most pharmaceutical manufacturers in the past implemented the “just in time” methodology for their raw material supplies, rather than stockpiling, decreasing inventories but also increasing the possibility of shortages in the event of a supply disruption. This approach may change in favor of higher inventories across the industry, for not only pharmaceutical raw materials but also finished drugs.

Manufacturers may begin to diversify raw material sourcing or invest in spreading production across different markets rather than in concentrated geographic areas, such as China and India. Another longer-term effect is likely to be the reindustrialization of pharmaceuticals production in Europe and the United States to reduce dependency on drug imports. This will lead to an increase in the demand for excipients in these countries.

Shilpi Mehrotra is a project manager for Kline’s  Excipients Market portfolio, and has just accomplished  the new study Specialty Excipients for Oral Solid Dosage Forms: Impact of COVID-19 on the Global Market​. Request more info.

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Impact of COVID-19 on the Global Synthetic Latex Polymers Market

Impact of COVID-19 on the Global Synthetic Latex Polymers Market

impact of Covid 19 on synthetic latex polymers market

Synthetic latex polymers are essential components of many consumer and industrial products. These aqueous dispersions function as binders but also bring many functional properties to end products. Their broad application portfolio—ranging from paints, adhesives, and construction to tires and leather and many more—makes forecasting the market for them complex.

The synthetic latex polymers market, as studied by Kline for close to 50 years, broadly depends on a combination of industrial output trends and consumer market trends in each country or region. More specifically, their markets in individual applications depend on end-use industry factors.

The COVID-19 pandemic has caused disruptions in industrial activities and consumer markets in many countries globally. As the virus continues to spread, governments worldwide have imposed quarantine and travel restrictions to curb it. This comes at a high cost to the economy as many workplaces remain closed, factories do not run, and the supply chain is still blocked. It is also inadvertently causing disruptions in the demand trend of synthetic latex polymers worldwide.

Global Synthetic Latex Polymer Consumption by End Use, 2019

Global Synthetic Latex Polymer Consumption by End Use 2019

The impact of the pandemic varies across the different application segments of synthetic latex polymers. Even though paints, adhesives, and construction together make up close to two-thirds of global consumption, there are around 18 sizeable application markets overall for synthetic latex polymers, and the impact on each of them is different.

The construction industry is expected to be badly hit by the pandemic; when it recovers, public sector construction activities are likely to improve more than the private sector in most countries. Paints and coatings will be negatively affected by the pandemic as new construction halts and consumers are less keen to redecorate. The adhesives market will also be affected; however, the packaging sector may be able to offset some impact due to packaged deliveries for increasing online orders.

Some application markets which were originally suffering will take a deeper hit because of the pandemic. As newsprint and magazines halt their print and distribution temporarily, the paper industry, for example, will not only be heavily damaged but will also be slow to recover due to increased competition from digital media. Carpet, leather, and molded foam markets will also suffer to a greater extent, as these commodities are non-essential or luxury in nature, and purchases may be delayed for long periods.

Amid a decline in most industries, some synthetic latex polymers markets will witness a surge. The gloves market is witnessing a huge rate of increase in demand, and supply is falling short. Meanwhile, disposable nonwovens, notably wipes, are experiencing considerable growth as the importance of hygiene and cleanliness increases.

Some other application sectors that follow the trend of economic activities of the country or regional market, such as tires, glass fibers, polishes and waxes, and printing inks, are likely to be negatively impacted and will recover as economies rebound.

As different countries go through different levels of impact and recovery from the pandemic, the global market will absorb the worst impact in 2020. The year 2021 is likely to see a recovery from the healthcare crisis, but economies may take longer to recover. Globally, the consumption of synthetic latex polymers is likely to witness a significantly slower growth than originally estimated for the five-year period between 2019 and 2024. The best-case scenario will still be below the original forecast as the COVID-19 crisis changes the world economic curve.

Global Synthetic Latex Polymer Consumption Forecast, 2019-2024

Global Synthetic Latex Polymer Consumption Forecast through 2024

As the synthetic latex polymers market is highly dependent on local and regional dynamics, it is important to study each of the major regional markets through consumption trends in different application markets. Kline’s report on Synthetic Latex Polymers: Impact of COVID-19 on the Global Market provides an insight into market forecasts in different scenarios.

Shilpi Mehrotra is a project manager for Kline’s  Synthetic Polymers Market research series. Request more info.

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Impact of COVID-19 on the Global Lubricant Basestocks Market

Impact of COVID-19 on the Global Lubricant Basestocks Market

impact of Covid 19 on basestocks market

The significant drop in lubricant demand expected in the first half of 2020 and the prospect of a prolonged and weak recovery—all due to the COVID-19 pandemic—has the potential to profoundly transform the basestocks industry.

For a decade, lubricant basestock supply has been characterized by significant surplus capacity. Static basestock demand, and the continuing addition of new capacity, translated into lower capacity utilization and a decline in profitability. Simply put, the basestock industry was in financial difficulty even before 2020. Now, while the COVID-19 pandemic and concurrent drop in crude oil prices has created more short-term pain, it may force some sanity into the industry in the long term.

A sharp decline in basestocks demand

Overall lubricant basestock demand is closely tied to finished lubricant demand, as lubricants account for more than 90% of the basestocks market. At the time of this writing, Kline estimates that global finished lubricant demand could decline by 15% to 30% in 2020 compared to 2019 due to the COVID-19 pandemic and related containment efforts. (See The Impact of the COVID-19 Pandemic on the Global Lubricants Industry.) As a result, overall lubricant basestocks demand is likely to see a similar drop in consumption, though the impact on different API Groups will be different.

With restrictions on people’s movement in lockdown situations, consumer automotive lubricants will be impacted immediately. However, in the event of prolonged lockdowns, significant reductions in demand will be experienced by commercial and industrial lubricant markets as well.

A contraction in the consumer lubricants market is having an immediate impact on demand for Group III/III+ basestocks, especially in markets with higher penetration of high-quality passenger car motor oils (PCMO). For example, the United States and much of Western Europe have lockdown conditions affecting personal mobility and hence PCMO demand. Both regions have a high share of high-quality PCMO blended with Group III/III+ and PAO. Therefore, these basestocks will see the most significant drop in demand. In contrast, due to the typical formulations used in the Asia-Pacific region and in the rest of world, the impact of reducing PCMO demand will be experienced by Group II/II+ and Group I basestocks in these regions.

Since Group II/II+ basestocks are the leading materials used to formulate heavy-duty motor oil (HDMO), a declining commercial segment will have the biggest impact on these basestocks. Of course, there will be regional variations, with North America and Asia-Pacific witnessing much higher declines in Group II/II+ in contrast to other regions that have relatively higher shares of Group I in HDMO formulations.

Demand for other automotive products including gear oils and automatic transmission fluids (ATF) is more dependent on factory-fill (driven by automotive production) than service-fill (driven by automotive population). Amid severe lockdown conditions, during which automobile prduction is halted, demand for these products is impacted more severely than engine oils. Decline in demand for ATFs will primarily impact demand for Group III/III+ and PAOs as these basestocks are used to blend fill-for-life ATF products.

A decline in demand for industrial products will see the biggest decline in demand for Group I basestocks since Group I accounts for the majority share in the formulation of industrial lubricants on a global basis. A decline in demand for industrial products will also result in demand loss for naphthenics.

Overall, the basestocks market could lose between 5.0 to 10.0 million tonnes of demand in 2020. Group I basestocks will account the most to this loss in demand (1.7 million to 3.6 million tonnes), followed very closely by Group II/II+ (1.7 million to 3.4 million tonnes), together accounting for at least two-thirds of the global basestock demand loss in 2020. The loss in Group III/III+ is expected to be around 0.7 million to 1.4 million tonnes, while the balance would be accounted for by Group IV and Group V (including naphthenic) basestocks.

Estimated Decline in Global Lubricant Basestocks Demand Due to Covid-19 Containment Efforts, 2020

impact of Covid 19 on basestocks market

Impact on basestock supply

The outbreak of COVID-19 can potentially reduce basestock supply in several ways:

  • Basestock producers adjust their supply to match the declining basestock demand. This can either happen in the form of reduced run rates for basestock plants or the temporary/permanent shutdown of operations.
  • Some basestock producers may use this time to do a maintenance turnaround.
  • Crude oil refineries will run at a lower rates as demand for fuel will decline. This invariably will result in constrained availability of feedstocks to run basestock units.

In response to a decline in demand of 5.0 million to 10.0 million tonnes, there will clearly have to be an impact on basestock supply. From preliminary estimates, the global basestock production in 2019 was around 40 million tonnes, representing an average effective operating rate of approximately 77%-78% (calculated as a fraction of effective capacity after taking into account planned and unplanned outages). If the basestock availability were to drop by 5 million tonnes to match the reduction in demand, the global average operating rate would be reduced to under 70%. Clearly, basestock margins will suffer tremendously at such a steep reduction in operating rates. Therefore, it is anticipated that to adjust basestock availability, both effective capacity and average operating rates will have to drop.

Impact of Covid-19 on Global Basestock Supply under No Change in Capacity, 2020

Impact of Covid-19 on Global Basestock Supply under No Change in Capacity, 2020

Such changes in basestock supply can potentially alter the basestock landscape permanently. For instance, basestock supply disruption in Europe will reduce Group I availability, motivating blenders in Europe and AME to search for alternatives most likely, Group II. Such formulation shifts are permanent because of the cost associated with the shift.  

An inevitable fallout of the current turmoil will be the deferring or shelving of planned basestock capacities. Such plans have been impacted by double whammy of plummeting basestock demand and unfavorable economics arising because of the decline in crude oil prices. In many instances, basestock addition/expansion was a part of the overall refinery expansion plans. In low crude oil prices scenario, several of these plans may have been rendered economically unviable. Any plan which hasn’t yet moved to the construction phase is likely to be re-evaluated. Around 3.5 million to 4.0 million tonnes of new basestock capacity was planned to be added globally over the next five yearsOf this, more than half is in the planning stage. Thus, at least 2.0 million to 2.5 million tonnes of new capacity plans may be deferred or canceled 

Conclusion 

A sharp decline in basestock demand is expected due to COVID-19. The actual magnitude of this decline will depend on the length and severity of the lockdown. While the decline in demand will be first borne by Group III/III+, owing to its higher usage of PCMO products, in the longer lockdown situation, Group I demand will suffer the most; it will be closely followed by Group II. This decline in demand will be accompanied by a decline in availability of basestocks. The supply disruptions could significantly alter trade positions for various regions, and blenders in some regions could face availability issues. This could potentially alter blending preferences and approaches followed in these regions as well. Because of the global supply-demand situation, much of the new planned capacity plans could be put on hold until the market environment improves. Further, the current market situation will result in some of the excess basestocks capacity being retired.  

Anuj Kumar is a project manager for Kline’s Global Lubricant Basestocks study, scheduled to be published in July 2020. Request more info.

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COVID-19: Beauty Ingredients Face a Tough Road Ahead

COVID-19: Beauty Ingredients Face a Tough Road Ahead

impact of Covid 19 on personal care ingredients

With most economists predicting a prolonged recession for the global economy, the usually resilient cosmetics industry will not escape the impact. While the Lipstick Theory implies that consumers will splurge on an expensive lipstick in place of an out-of-reach luxury item during recessionary times, the COVID-19 economic fallout will have a pronounced impact on consumer spending. While many personal care products are essential, there are others that are not, along with products for which consumers will make alternate choices. These changes in consumer consumption will directly impact Kline’s outlook for global personal care ingredients.

U.S. Market on Track for Sharpest Decline in Over 60 Years

Kline expects that consumer behavior and spending in 2020 will shift even more dramatically than the last recession in 2009. The cosmetics and toiletries market is heading toward the sharpest decline ever recorded in the 60-plus years Kline has been tracking the market, with a decline of 5% likely in 2020.  During the 2009 recession, the market dipped by 0.8%. The only other time Kline noted a decrease was a 0.3% falloff in 1991 amid another recession.

Consequences of COVID-19 in personal care will likely lead to a reduction by consumers on discretionary expenses (e.g., fragrances, hair styling products), while spending on basic necessities would be relatively protected (e.g., personal liquid soap, hand and body lotions). With this approach, Kline analysts have classified each product according to such consumer needs, from critical essentials or “rescue categories” to non-essentials or “can-wait” categories.  The new phenomena of stay-at-home mandates and social distancing are also major factors in 2020 consumption and unique to this recession.

PROBABLE IMPACT ON FINISHED PRODUCTS

ChartImpactFinishedProducts

Recession-Resilient or At Risk: The Ingredients Outlook

Ingredient demand will closely follow product consumption trends. Consequently, ingredient groups such as UV absorbers, pigments, and hair fixative polymers that are used, respectively, in sun care products, makeup products, and hair styling products could be hit the hardest. Conversely, ingredients such as preservation solutions, emollients, and mild-surfactant products are expected to have sustained if not exceptional growth due to the heightened use of hand soaps and sanitizers.

PROBABLE IMPACT BY INGREDIENT CATEGORIES

impact of Covid 19 on beauty products and ingredients

INGREDIENT GROUP COVID-19 GROWTH OUTLOOK
Antimicrobials Key ingredients of the formulation “chassis,” antimicrobials are essential and therefore will continue to be used across all product categories. Kline also expects additional volumes coming from lotion and hand sanitizer applications.
Surfactants Surfactants are largely used in rinse-off formulations (hair care and cleansers), which are proven to be more resilient products during recessions.
Emollients Typically used in skin care formulation, this group also includes a significant proportion of humectants used in oral care products (40% in volume). Emollients could be impacted by a decline in professional and premium consumer products.
Rheology Control Agents Ingredients mainly used in oral care. Skin care, and hair care products account for a third of overall volumes. While there will be some mild moderation in consumer frequency of use, stable moderate growth is expected.
Emulsifiers Three-quarters of volumes are used in skin care products (leave-on); decline is anticipated due to a fall-off in sales of premium skin care, mitigated by mass, masstige and budget products
Conditioning Polymers These ingredients are mainly used in hair care, followed by skin care, antiperspirant, and deodorant products. Categories will be mainly impacted by the pressure on leave-on hair care products.
UV Absorbers Sun care products will suffer from the negative impact on recreational activities and tourism; therefore, UV absorbers will likely be among the deepest impacted.
Hair Fixative Polymers The consumption of hair fixative polymers— used in hair styling products—is expected to drop due to both a decline in consumer product uses and salon services. This ingredient category could be among the most adversely impacted.
Color Cosmetic Ingredients Formulated in makeup and hair colorants, ingredient consumption will dip due to a decline in use/frequency of use and a sharp decline in the professional salon industry.

Predicting the Post-Pandemic Future of Personal Care Ingredients (PCI)

Without a doubt, the personal care industry will experience declines across the globe in 2020. For ingredients, Kline forecasts modest growth as global economies work toward recovery over the next several years. Kline’s assessment of the expected CAGR for personal care ingredients for 2018 through 2023 is based on a U-shape recession, followed by a rebound expected in 2021. Several scenarios have been developed, here is the likelihood one:

Region/Country PCI CAGR 2019-2023 Forecast in %
United States 1.1
Europe 0.7
China 1.6
Japan 0.1
India 2.8
Brazil 1.5

(forecast as of Mid-April 2020)

In our just-published add-on report to Kline's Personal Care Global Market Analysis - Personal Care Ingredients: Impact of COVID-19 on the Global Market, Kline provides its forecasts to 2023 for more than 10 ingredient categories covering best-case, most-likely case, and worst-case scenarios, with supporting assumptions and rationale.

Yann Pencolé provides strategic business intelligence services to Kline’s clients in Europe as well as globally. He is based in Kline London office.

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COVID-19 and Its Far-reaching Implications for European Finished Lubricant Market

COVID-19 and Its Far-reaching Implications for European Finished Lubricant Market

impact of Covid 19 on lubricants marketIntroduction

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

Finished Lubricant Demand in Select European CountriesTogether, 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

Spread of COVID-19 in Europe

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

Finished Lubricants Stage 2 Demand Contraction

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

PVL consumption in Europe

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

CVL consumption

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

Industrial lubricant consumption in Europe

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

Lube Growth Chart

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.

 

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The Impact of COVID-19 on the Indian Finished Lubricant Market

The Impact of COVID-19 on the Indian Finished Lubricant Market

impact of Covid 19 on India lubricants market

The Indian lubricant market is the third-largest in the world after the United States and China and one that still shows some growth prospects—or, at least, it did before the COVID-19 pandemic. In a study on the Indian lubricant market completed before the onset of COVID-19, growth was projected at 1.5% per year between 2019 and 2024, with the consumer segment showing the strongest growth at 3.1% during the same period. How will COVID-19 impact the Indian economy and the lubricants market? In this article, Kline will provide an initial assessment of the market. As noted with other articles in this series, we are in an unprecedented and fast-changing environment. Thus, the analysis presented here may need to be updated as the situation changes.

India’s Response to COVID-19

The number of COVID-19 cases reported in India (more than 9,000 as of April 13, 2020) has been very low for a country with over 1.3 billion people. Either the country has been lucky or, as some health experts point out, the small number of cases is a result of minimal testing. India has been fortunate because it does not have significant movement of people to and from China. As a result, the onset of the disease in India was delayed. The Indian government acted swiftly, first severely reducing air travel with affected countries and later closing all air travel. On March 22, 2020, the government imposed a 14-hour curfew where all activities and public movement of people were banned. On March 24, 2020, the government announced a three-week lockdown of all public activities. As at the time of writing this article, the lockdown seems to have been moderately successful. As per the “COVID-19 Government Response Tracker” developed by the University of Oxford[1], the Indian government response has been one of the most stringent in the world. The lockdown includes a ban on people stepping out of their homes; closure of all commercial and private establishments except those deemed essential; and closure of educational institutes, places of worship, and other locations where people gather. In addition, all transport links have been shut down.

The lockdown has severely impacted the informal sector of the economy, which utilizes most of India’s daily wage workers. State and central governments’ initiatives to offer free food supplies for a period of up to three months, along with some monetary assistance, will help control the impact on the sector and preserve people’s savings to an extent. The government has also advised employers to not deduct salaries or terminate employment during the lockdown period. While this might offer temporary relief to the formal job sector, the employment situation may exacerbate later in the year if the economic activity doesn’t rebound. To tackle this situation, the central government has made a commitment of USD 24.2 billion (INR 1.7 trillion) as a relief package, along with USD 2.1 billion (INR 150 billion) for virus containment efforts. This accounts for close to 6% of the country’s annual budget.

As the lockdown period ends, some states are petitioning the central government to extend the quarantine, but other government officials are pointing out the economic cost of the containment efforts. At the time of this writing, it appears that the lockdown will be extended until May 3, 2020.

How the Lockdown Impacts the Lubricants Industry

India accounts for nearly 7% of global lubricant demand. While the overall lubricant demand growth in the country has slowed in the last couple of years, it remains one of the fastest-growing finished lubricant markets in the world. Before the COVID-19 pandemic, the Indian lubricant market grew due to such factors as the presence of a large industrial manufacturing sector comprising such industries as automotive and auto component manufacturing, chemicals, pharmaceuticals, tire and rubber, power generation, and mining, among others; a large and growing population; a large and growing commercial and consumer vehicle population; and a growing transport infrastructure.

Based on estimates developed before the current crisis, the Indian lubricant market (including process oils) for 2020 is 2.9 million tonnes, with more than half of the demand accounted for by the industrial segment. At the other end, consumer automotive lubricants account for just over 15% of the total market.

In order to quantitatively assess the impact of COVID-19 on volumetric lubricants demand in 2020, Kline’s thinking is that COVID-19 will impact each market segment and sector differently and, as such, each sector’s ability to function as close to 100% of normal consumption levels as possible. Kline’s analysis looks at four stages of the COVID-19 crisis:

  • Stage 1 or Pre-crisis
  • Stage 2 or Lockdown
  • Stage 3 or Recovery
  • Stage 4 or Post-crisis

In the analysis that follows, we look at how different segments of the Indian lubricant market will fare under Stage 2 (lockdown) conditions and the implications for 2020 demand contraction depending on the depth and duration of this stage.

The consumer automotive lubricant market is dominated by motorcycle oils. Two-wheelers are the preferred mode of transportation for a large portion of the population and are also used for delivery services by various businesses. The lockdown has resulted in a severe reduction in the use of passenger cars and two-wheelers for personal mobility. In addition, there are restrictions on fuel retailing to private vehicles in some districts to ensure compliance with the lockdown conditions. The impact on finished lubricant demand could be assessed by analyzing how various points of lubricant installation for consumer vehicles will fare amid this lockdown. Franchised & independent workshops (F&IWS), dealerships, and general repair garages are closed nationwide, as they are not deemed as essential services. Therefore, any demand uptake from these establishments is stalled. Fuel stations continue to operate but at much lower rates. In case of an extended lockdown, these outlets will face inventory shortages, which will further hinder their sales. Factory-fill is an important segment of the consumer automotive lubricant market, accounting for under 10% of demand in normal circumstances. With almost all automotive assembly plants, plus auto and auto ancillary units, being shut during the lockdown, demand for factory-fill has been be scaled down significantly. Even after the lockdown ends, recovery in automotive sales could be slower for the rest of the year. This is not only due to the economic impact of COVID-19 but also the introduction of Bharat Stage (BS) VI compliant vehicles beginning April 1, 2020, the costs of which are higher than BS IV compliant vehicles. As a result, the consumer automotive lubricant segment will see its demand shrink to less than 5% of normal for the duration of the lockdown (Stage 2).

The commercial automotive market includes various on-highway and off-highway fleets, each of which will experience a different level of impact based on their role in the economy. Under the lockdown, only transportation of essential and select non-essential consumer goods is permitted. Movement of other consumer or industrial goods has been halted. Owner-operators form a large component of on-highway fleets. The impact of the lockdown on this segment is probably worse than fleets, as owner-operators have more capital constraints and a much lower utilization compared to fleets. On the other hand, owner-operator vehicles are being used primarily in last-mile connectivity, an activity that will continue even in lockdown. As per the All India Motor Transport Congress, an umbrella body of goods vehicle operators representing about 10 million truckers, the daily movement of trucks has collapsed to less than 10% of normal levels. Even though the transportation of essential goods is permitted, the proliferation of checkpoints and the lack of roadside support services have resulted in a severe contraction in the trucking segment. This has been reflected in a reduction of diesel sales, with a decline of as much as 26% in March 2020 compared to the previous month.

The impact on the off-highway segment is less severe. Farming activities have not been impacted significantly. Moreover, the maintenance of agricultural equipment is cyclical, which peaks around the harvest season. Financing for construction projects is already shrinking. Due to a general reduction in construction activities, lubricant consumption is reduced. In the mining sector, coal mines are still operating at normal rates even though power generation is low, as inventory is being built for the monsoon season. However, some coal mining operations, such as Singareni mines, are closed. Finally, sales of commercial vehicles, both on-highway (trucks, buses, three-wheelers) and off-highway (tractors and other agricultural equipment, plus mobile construction and mining equipment), have been impacted directly, affecting the factory-fill volume.

Estimated India CVL Stage 2 Demand Contraction by Sector, 2020

impact of Covid 19 on Commercial Vehicle Lubricants

As a result of the impact on the various sub-segments, the commercial automotive lubricant segment will see its demand shrink to less than 50% of normal for the duration of the lockdown (Stage 2).

India has a large industrial sector. Kline studied industrial lubricant consumption in India for 13 end-use industries, of which five industries—chemicals, power generation and transmission, auto and auto component manufacturing, metals, and off-highway transportation—account for nearly 90% of lubricant demand.

Metals: During the lockdown period, most metal processing units have scaled down production. Their operations will resume after the lockdown but will be impacted by a lack of supplies and inventories. In the longer term, demand for metals will decline proportional to the rate in decline of construction activities and industrial output. One fear in this segment is that with slowing construction activities and demand for consumer goods across the world, China will have surplus metal production, which might be supplied to markets like India, leading to lower domestic production.

Chemicals: The chemicals industry (including tires, pharmaceuticals, and cosmetics, among others) is the largest consumer of industrial lubricants due to the consumption of rubber process oils and white oils. The tire industry in the country might not only be impacted due to weak automotive sales and delayed tire replacement but also due to the potential threat of low-cost tires being exported by China. White oils used in the pharmaceutical and cosmetics (non-luxury) segments continue to be used due to the essential nature of the final products. Except for petrochemicals, bulk and specialty chemicals, demand for additized lubricants is expected to be regular.

Power generation and transmission: Electricity demand in the country has declined in the wake of the lockdown, primarily due to the closing of commercial and industrial establishments. However, demand for additized lubricants used in the power generation sector will recover as the electricity demand recoups. Transformer oils form a large part of lubricants used in the sector. They are primarily used in first-fill of electrical equipment. Focus on recovery from COVID-19 will take higher priority as opposed to funding for expanding power transmission and distribution infrastructure. This will impact the demand for transformer oils.

Off-highway transportation: During the lockdown period, passenger and goods trains and commercial aircrafts have ceased operations. With a reduced movement of trucks, loading/unloading from ships is being delayed and, as a result, the marine industry in India is almost idle. In the long run, with the slump in global demand and a decline in trade, the marine sector will have a weak recovery.

Auto, auto component, and general engineering: The impact on the automobile (assembly lines and auto component industries) sector will be widely visible as consumer spending tightens, resulting in slow sales in consumer vehicles. Reduced industrial output would reduce the need for new on-highway vehicles as the existing vehicle parc could cater to the reduced demand. General engineering industries will also witness slow recovery.

As a result of the impact on different end-use industries, the industrial lubricant segment will see its demand shrink to just over one-third of normal for the duration of the lockdown (Stage 2).

Estimated India Industrial Lubricants Stage 2 Demand Contraction by Sector, 2020

impact of Covid 19 on India lubricants market

Summary

In comparison to other markets, if not with its own historical performance, the Indian lubricant market was growing at a slow to moderate pace before the COVID-19 pandemic. In the long run, the market should return to its normal growth rates, as the fundamental demand drivers are still in place. However, 2020 will see a contraction in demand. The severity of this contraction will be contingent on the length of the lockdown and the government’s efforts to revive the economy. Kline analyzed three scenarios with different underlying assumptions on length and severity of the lockdown and developed market demand estimates under these scenarios. Based on this analysis, the overall lubricant consumption in India in 2020 could decline between 6% and 23% in comparison to 2019, a drop of between 160 kilotonnes and 640 kilotonnes.

Estimated India Finished Lubricants Demand Growth, 2019 to 2020

impact of Covid 19 on India lubricants market

COVID-19 will make 2020 a difficult year for the Indian economy and the lubricants industry. As per the International Monetary Fund (IMF), COVID-19 will result in a global recession worse than the global recession of 2008-2009. But there is light at the end of the tunnel: The IMF notes that recovery in global economic output could be as early as 2021. The Indian economy is still not well connected with the global economy as other large economies. Economic growth in the country is more reliant on domestic consumption than exports. Thus, reduced consumer spending in other economies will not have a significant impact on Indian economic growth. In addition, the reduction in crude oil prices will help reduce India’s oil import bill. This will give the government more fiscal room to help revive the economy.

In the post-COVID-19 economy, lubricant suppliers will have to continue monitoring the environment for business opportunities and challenges arising from such market trends as increased synthetic penetration, introduction of new regulations like Bharat Stage VI, extension of oil drain intervals, changes in automotive and industrial technologies, continued EV penetration, and changing consumer preferences.

In the next installment of Kline’s analysis of the impact of COVID-19 on the global lubricants industry, our Energy Practice will be presenting insight and perspective for the entire European region.

Hareesh Nalam is a Project Lead in the Market Research division of Kline’s Energy Practice and the lead author of Kline’s soon-to-be published study Opportunities in Lubricants: India Market Analysis. He is based in the Hyderabad, India office.

[1] https://www.bsg.ox.ac.uk/research/research-projects/oxford-covid-19-government-response-tracker

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impact of covid19 on the US lubricants market

The Impact of COVID-19 on the United States Finished Lubricants Industry

impact of covid19 on the US lubricants marketFollowing the premier article in Kline’s series on the impact of COVID-19 (C-19), written by Ian Moncrieff and Milind Phadke and published on March 31, this installment will address how the C-19 pandemic will impact the demand for automotive and industrial lubricants in 2020 by sector and offer three scenarios based on the full/partial lockdown of many segments of the U.S. economy. Recognizing that this is a moving target and policy changes often occur daily, if not hourly, scenario outcomes will be updated accordingly.

Background

The United States is the largest lubricants-consuming country, accounting for 20% of total global lubricants demand, and 84% of total North America demand in 2019. China follows at 18% of global and 42% of total Asia-Pacific demand. Given the combined size of these two country markets, any disruption in the normal operation of the lubricants industry in either country can have serious implications for lubricants suppliers, distributors, B2B/B2C end users, basestocks, and additives suppliers.

The United States consumes more than 8.0 million tonnes (MT) of automotive and industrial lubricants annually and, pre-C-19, is forecast for no overall volumetric growth over the next 10 years. There are many reasons for this despite, for example, a vibrant economy, low unemployment, GDP growth, solid new vehicle sales rates, and a dynamic manufacturing base. Rising penetration of synthetics and premium-quality products enable longer drain intervals, reduced downtime, efficiency improvements, and adoption of low-viscosity grade automotive engine oils. Combined, alternative power generation, growth in the penetration of electric vehicles, advanced vehicle powertrains and industrial machinery, and better maintenance practices supported by technology, Industry 4.0, and IoT, among others, suppress volumetric demand while delivering revenue growth to the industry.

Analysis/Approach

In order to quantitatively assess the impact of C-19 on volumetric lubricants demand in 2020, Kline’s thinking is that C-19 will impact each individual market segment and sector differently and, as such, each sector’s ability to function as close to 100% of normal capacity as possible in 2020.

Kline’s analysis looks at essentially four stages of C-19:

  • Stage 1 or Pre-crisis
  • Stage 2 or Lock-down
  • Stage 3 or Recovery
  • Stage 4 or Post-Crisis

Depending on the duration in terms of number of weeks for Stage 2, and whether or not the market in Stage 4 reverts back to 100% of normal lube consumption, we are able to produce three different scenarios which provide a view of the volumetric decline in U.S. automotive and industrial lubricants that can be expected in 2020 compared to 2019.

For example, in many parts of the United States, the franchised workshop (FWS) or new car dealership sector is operating under government regulations that severely restrict the retail side or vehicle sales business, while the service side is still deemed as an essential business and remains open to the public. Given the stay-at-home guidelines including business and personal/leisure travel restrictions imposed on the general public at least through April 30, vehicle usage is severely hampered, resulting in less demand for motor fuels and less demand for routine maintenance including lube, oil, and filter changes. Therefore, the passenger vehicle lubricants (PVL) demand for a typical service side of an FWS operating throughout the four stages of C-19 in 2020 will contract, as the sector is not operating at normal levels.

Based on Kline’s understanding of the dynamics of each automotive and industrial sector, we are able to estimate the negative impact of C-19 on operating levels for each of the 35 sectors combined that consume automotive and industrial lubricants in the United States and, as such, offer three different scenarios for volume losses for CY 2020.

Passenger Vehicle Lubricants

The United States is primarily a do-it-for-me market, with quick lubes as its leading sector, accounting for 26% of total U.S. PVL demand, followed by FWS at 23%.

Est. U.S. PVL Stage 2 Operating Levels by Sector, 2020

PVL relative operating rates vs. norm

The quick lubes sector is represented by national and regional company owned-operated and franchised locations operating under such familiar names as Jiffy Lube, Valvoline Instant Oil Change, and Take 5 Oil Change, along with privately owned, single-site local neighborhood locations across the country.impact of covid 19 on quick lubes While still operational and deemed as essential businesses offering services important to the economy and general public, these eight PVL sectors are all operating under similar and different conditions and are therefore operating at below normal 100% consumption levels based on Kline’s assumptions. Moreover, given the stay-at-home guidelines and reduced vehicle usage, the number of daily lube, oil, and filter changes performed by installers is a fraction of normal levels; retail sales of lubricants for do-it-yourselfers and commercial sales by retailers to installers is equally depressed.

The FWS sector is doing whatever it can to keep service bays operating and the business generating revenue despite the shuttered showrooms and few, if any, new vehicles being sold during C-19 Stage 2. Examples include modifying business hours to accommodate customers, vehicle pick-up and drop-off concierge services, expanded use of social media, collaboration with local chambers of commerce, servicing all makes and models, and even such unique promotions as a free roll of toilet paper with a regular oil change.

Overall, based on Kline’s assumptions of market conditions, the U.S. PVL market segment and its component sectors combined are operating at <50% of their pre-crisis, normal consumption level due to C-19. From calculations for Scenarios #1, #2, and #3 based on the number of weeks for Stage 2 and the rate of post-crisis recovery, Kline expects PVL lubricant demand to contract at between 15%-24% in 2020. On a volume basis, potential losses ranging from 300 kilotonnes (KT) to 525 KT can be expected.

Commercial Vehicle Lubricants

The U.S. market for commercial vehicle lubricants (CVL) is nearly evenly split overall into sectors that operate vehicles and equipment in On-Highway and Off-Highway applications. While the current factors impacting the PVL segment exist in the CVL segment, e.g. stay-at-home guidelines, fleets and trucking companies operating both nationally and regionally are still open for business and deemed as essential businesses providing everyday and critical products to anxious consumers. Moreover, while fleets are enduring the same staffing issues as FWS and quick lubes, these businesses are expected to maintain, as close as possible, their normal consumption levels.

Est. U.S. CVL Stage 2 Operating Levels by Sector, 2020

commercial vehicle lubricants contraction COVID

The for-hire fleets sector, which accounts for 23% of total U.S. PVL demand, includes large truckload (TL) companies such as Stevens Transport, less-than-truckload (LTL) companies such as Old Dominion, and equally important, owner-operators shipping products coast-to-coast and to local communities still operating trucks and equipment. Given the immediate need for medical equipment and supplies to combat  C-19, it’s critical for the for-hire fleets sector to continue to maintain normal preventive maintenance (PM) schedules/programs of its vehicles and perhaps even reduce oil drain intervals to ensure the vehicles avoid any unplanned downtime. As such, Kline expects that the for-hire fleets sector is operating at >75% of its normal, pre-crisis consumption level and demand for heavy-duty motor oil (HDMO) and other CVL lubricants will remain strong during 2020.

Lubricants suppliers seeking to solidify their supply relationships with this critical CVL sector should review their product and service portfolio to ensure that customers are gaining maximum advantage to realize sustainable and reliable up-time operation of their entire fleet.

The lease-rental sector has many dimensions, from providing leased equipment to construction companies, offering rental vehicles to business and leisure travelers at airport locations, and leasing H-D vehicles used by for-hire and private fleets. Given the impact of C-19, each of these sub-sectors is under different stress factors and combined, based on Kline’s assessment, the lease-rental sector overall is operating at between 50%-74% of its normal level.

For lubricants suppliers seeking to assess and prioritize how best to serve this sector, Kline suggests targeting the companies that lease vehicles and equipment and offer PM service to over-the-road (OTR) trucking fleets and, similar to the for-hire fleets sector, ensure their entire product and service offering is delivering maximum value to the leasing company and, in turn, its customers.

The transportation sector is experiencing reduced demand for its services provided by, for example, tour bus operators, school bus operators, and ride sharing/hailing providers due to mandatory stay-at-home guidelines, school closures, and reduced business travel and leisure activities. Given these factors, Kline expects the sector is operating at <50% of its normal consumption level.

Agriculture is the largest CVL consuming sector in the United States at 27% of the total and an important contributor to the health and sustainability of the overall U.S. economy. Despite all the negative factors associated with C-19, the nation’s farming industry must operate at normal levels, as seasonal preparation, planting, and harvesting activities cannot be delayed, postponed, or compromised. As such, the expectation is that mobile and stationary farming vehicles, machinery, and equipment must still be maintained according to existing OEM and owner-operator PM schedules to ensure reliable and continuous operating rates throughout the four stages of C-19. Kline’s assessment of the agriculture sector is that it is operating at a near-normal consumption level of >75% and will continue to demand CVL products such as HDMO and tractor hydraulic fluid, among other products and services from suppliers.

Overall, based on Kline’s assumptions of market conditions, the U.S. CVL market segment and its component sectors combined are operating closer to the high end of between 50%-74% of their normal level due to C-19. From calculations for scenarios #1, #2, and #3 based on the number of weeks for Stage 2 and the rate of post-crisis recovery, Kline expects CVL lubricant demand to contract at between 7% and 14% in 2020. At-risk volume losses range from 130 KT to 260 KT for CY 2020.

Industrial Lubricants

Including process oil, industrial lubricants (IND) demand among the 17 industry sectors researched by Kline accounts for >50% of the over 8.0MT U.S. finished lubricants market. The first three sectors combined account for nearly half of the total IND consumption in the United States and provide critical key components and final products supporting the entire U.S. industrial and automotive economy.

Est. U.S. IND Stage 2 Operating Levels by Sector, 2020

industrial lubricants contraction COVID

Announcements from all of the major passenger vehicle OEMs about plant closures and employee furloughs have resulted in the transportation equipment manufacturing sector significantly reducing its demand for rubber tires and related products, ferrous and non-ferrous material, and fabricated metal products; this negatively impacts the sectors producing and delivering these key components. As such, IND demand contraction is spread across many sectors, some able to absorb the loss, others unable.

However, due to the diverse products produced in each sector and their respective reach, some sectors are able and expected to operate at near-normal operating rates despite the impact of C-19. For example, the medical and healthcare industry is under intense pressure to deal with the exponential growth in patients requiring medical attention for C-19 and, as such, needs an uninterrupted inventory of protective clothing and medical machinery and equipment, among other related products. Therefore, while rubber tire demand is in decline, the rubber and plastic products sector must continue to operate and supply the components and final products to manufacture these critical healthcare products.

Output of the chemicals and allied products sector, which includes building blocks, components, and ingredients far-reaching into nearly every final product required for our economy to function, is an essential sector and must continue to operate at near-normal rates despite the disruptions caused by C-19. Likewise, electrical equipment and energy transmission, the power generation backbone of the United States, cannot undergo any significant and extended supply interruptions. These three sectors have a strong product demand for process oil including medical grade white oil, synthetic hydraulic fluid, turbine oil, and natural gas engine oil, among many others. As such, based on Kline’s assessment, these sectors are operating at near-normal levels.

The food processing sector, which accounts for <2% of total IND demand, is a critical industrial sector with manufacturers and suppliers expected to operate at near-normal levels to keep the food pipeline full and retail shelves of the nation’s grocers fully stocked. This sector is unique in that it requires general-purpose industrial oils and fluids as well as specialty, food-grade synthetics such as gear oil, grease, and compressor fluid.

Lubricants suppliers to this important sector should review their entire product and service portfolio to ensure that it meets the needs of the sector and delivers maximum value, equipment efficiency, and up-time.

Overall, based on Kline’s assumptions of market conditions, the U.S. IND market segment and its component sectors combined are operating closer to the high end of between 50%-74% of their normal, pre-crisis consumption level due to C-19. From calculations for scenarios #1, #2, and #3 based on the number of weeks for Stage 2 and the rate of post-crisis recovery, Kline expects IND demand to contract at between 8% to 15% in 2020. Volumetrically, between 340 KT to 675 KT is at risk for loss in CY 2020.

Summary

At the beginning of 2020 and pre-C-19, Kline’s forecast for the U.S. PVL, CVL, and IND lubricants industry was no overall volumetric growth. As a result of Kline’s industry knowledge and its evolving analysis of the C-19 pandemic using a proprietary four-stage impact and three-scenario modeling assessment for each automotive and industrial lubricants consuming sector, we estimate an overall volumetric decline of between 10% and 17%. This represents losses of 0.8 MT to 1.4 MT, depending on the depth and duration of the C-19 pandemic in the United States.

Estimated U.S. Finished Lubricants Demand Growth, 2019 to 2020

US lubricants demand growth forecast COVID impact

Despite the negative impact of C-19 on the U.S. economy and the lubricants industry, recovery will come. Post-crisis, the market will settle to some degree of normalcy, and industry fundamentals that were in place pre-C-19 will return to drive the market. Until such time, the U.S. lubricants industry must operate during 2020 under a period of uncertainty and endure unprecedented volume declines, rising unemployment, social distancing, stay-at-home guidelines, and business closings not seen in past financial and economic crises.

Post C-19, lubricants suppliers should focus on individual sectors, not the entire market, and monitor these leading industry fundamentals for value and growth opportunities:

  • Synthetics penetration in automotive and industrial lubricants will continue to grow driven by OEM technical demand and end user acceptance.
  • Government and industry regulations for reductions in automotive emissions and improvement in fuel economy continue.
  • OEM and end-user demand and acceptance for extended oil drain intervals continue.
  • Operating efficiency gains in industrial machinery and equipment will be supported and enabled by synthetics, technology, and more diligent and measured maintenance practices.
  • EVs will continue to penetrate the market and displace ICEs and offer opportunities in alternative and specialty oils and fluids.

In the next installment of the Kline Energy Practice’s analysis of the impact of COVID-19 on the global lubricants industry, we will be presenting our insight and perspective on India's finished lubricants industry.

George Morvey is an Industry Manager in the Market Research division of Kline’s Energy Practice. He is based in its Parsippany, New Jersey headquarters office.

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The Impact of the COVID-19 Pandemic on the Global Lubricants Industry

The Impact of the COVID-19 Pandemic on the Global Lubricants Industry

Key Takeaways 

  1. COVID-19 could last from six to 18 months worldwide
  2. Economic impacts are already severe, and evolving national policies will impact the shape and duration of economic recovery
  3. Oil markets are in free fall, with transportation fuels hit hardest
  4. Based on our analysis of the market situation at time of writing this article, 2020 lubricants consumption could drop by at least 15%, and perhaps even up to 30%, from 2019 levels with PCMO most impacted
  5. Adverse lubricants market signals could extend beyond 2020 if COVID-19 persists or social distancing becomes embedded in corporate behaviors

Impact of COVID-19 on Oil and Lubricants market

How Did We Get Here? 

The COVID-19 pandemic, which started in China in November 2019, now afflicts much of the world. What will be its immediate and lasting impacts on the global economy and, specifically, on the lubricants industry? In a series of articles over the next weeks, Kline will analyze the impacts of this pandemic on various dimensions of the global lubricants, base oils, and additives industries. 

The story of the spread of SARS-CoV-2, the virus that causes COVID-19, has been widely told and does not need repeating here. What is now clear is that the virus is highly transmissible and has a higher mortality rate than seasonal influenza. There are currently no medicines or vaccines to fight the disease. The only effective weapon at present is social distancing, imposed by various means, to slow transmission of the disease. 

At best, it would seem that radical measures adopted worldwide could contain the impact of COVID-19 to mid-year (a lifecycle of a little over six months). Just as likely, based on the history of previoupandemics such as the Spanish flu and Swine flu, its extent could persist for up to 18 months, lasting into 2021. 

The Economic Consequences 

COVID-19, and the restrictions put in place to inhibit its spread, will have massive and potentially long-lasting consequences. Governments are responding with measures to stimulate economies, assure liquidity, and soften impacts on the...

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Impact of COVID-19 on Oil and Lubricants market

The Impact of the COVID-19 Pandemic on the Global Lubricants Industry

Key Takeaways 

  1. COVID-19 could last from six to 18 months worldwide
  2. Economic impacts are already severe, and evolving national policies will impact the shape and duration of economic recovery
  3. Oil markets are in free fall, with transportation fuels hit hardest
  4. Based on our analysis of the market situation at time of writing this article, 2020 lubricants consumption could drop by at least 15%, and perhaps even up to 30%, from 2019 levels with PCMO most impacted
  5. Adverse lubricants market signals could extend beyond 2020 if COVID-19 persists or social distancing becomes embedded in corporate behaviors

Impact of COVID-19 on Oil and Lubricants market

How Did We Get Here? 

The COVID-19 pandemic, which started in China in November 2019, now afflicts much of the world. What will be its immediate and lasting impacts on the global economy and, specifically, on the lubricants industry? In a series of articles over the next weeks, Kline will analyze the impacts of this pandemic on various dimensions of the global lubricants, base oils, and additives industries. 

The story of the spread of SARS-CoV-2, the virus that causes COVID-19, has been widely told and does not need repeating here. What is now clear is that the virus is highly transmissible and has a higher mortality rate than seasonal influenza. There are currently no medicines or vaccines to fight the disease. The only effective weapon at present is social distancing, imposed by various means, to slow transmission of the disease. 

At best, it would seem that radical measures adopted worldwide could contain the impact of COVID-19 to mid-year (a lifecycle of a little over six months). Just as likely, based on the history of previoupandemics such as the Spanish flu and Swine flu, its extent could persist for up to 18 months, lasting into 2021. 

The Economic Consequences 

COVID-19, and the restrictions put in place to inhibit its spread, will have massive and potentialllong-lasting consequences. Governments are responding with measures to stimulate economies, assure liquidity, and soften impacts on the public. 

China is considered the OPEC of industrial goods. The country has a leading role in several industries, including automotive, electronics, and pharmaceuticalsChina, with other afflicted countries such as South Korea, Japan, Germany, and the United States, are all vital to global supply chains. Virus containment efforts have caused factory closures due to worker shortages, non-availability of parts, and shutdown of logistics networks. Even as China lifts these restrictions, the supply-side shock will continue for some time, as restrictions in other countries impact Chinese exports. Early insights into the damage caused by COVID-19 in China show industrial production down by 13.5% in Jan/February 2020 vs. December 2019. Even larger declines are reported in Chinese retail sales and exports. The impacts on Chinese GDP in 2020 are still being assessed, but early estimates suggest a decline of 3%-5% over pre-crisis growth forecasts of +5.5%. No real growth is a possibility. 

The damage caused by COVID-19 to oil markets has been much more severe. On March 26, the International Energy Agency announced that world oil demand could drop by up to 20%, from 100 to 80 million B/D, while the crisis persists. Though hard data lags behind, current U.S. statistics show the early impact on domestic petroleum products supplied (a leading indicator of consumption) with a 10% drop reported in one week between March 13 and 20. 

Chart 1 1Source: U.S. DOE/EIA

Hardest hit have been transportation fuels (jet kero and gasoline), registering demand declines of 16% and 9%, respectively, between March 13 and 20. And these declines will only increase as COVID-19 spreads across the United States and travel bans and social distancing measures impact a greater proportion of the population.

Previous non-medically driven recessions, such as the global financial crisis of 2007-2009, have had far lesser impacts on oil consumption in aggregate. While financial markets and consumer spending were affected, oil consumption fell in lockstep with global GDP.

chart 2 1Sources: IMF, BP

What we can presuppose is that oil markets will behave quite differently with COVID-19, which impacts physical behaviors in addition to financial ones. Oil markets are already reflecting that difference.

Taking what we know, at present, about the potential impacts of COVID-19 on global economic activity under the most optimistic and pessimistic of assumptions, what approximate early assessment can we postulate for the possible range of impacts on global GDP and oil demand in 2020?

 

Measure COVID-19 Impacts
1Q/2Q 2020 Only
COVID-19 Extends
into 2021
Impact on 2020 Global GDP -5% -10%
Impact on 2020 Global Oil Consumption -10% -20%
-          Impact on Jet Fuel -15% -30%
-          Impact on Gasoline -10% -20%
-          Impact on Diesel -5% -10%

Source: Kline estimates

Impact on the Global Lubricants Market

First, we have empirical evidence that global lubricant consumption in aggregate is driven by changes in real GDP, with a historical negative demand elasticity of between 3% and 4%. In other words, lubricants consumption is expected to change at a rate of some 3%-4% per year below the projected change in annualized global real GDP over the same period. Based on the above range of real GDP growth estimates, global lubricants demand in 2020 could be expected to decline by between 8% and 15% from 2019 levels. But, in reality, because of the unique characteristics of the COVID-19 pandemic, we may expect the decline in lubricants consumption to be even greater. Let’s look at two examples from the 2007-2009 financial crisis.

The global financial crisis of 2007-2009 truly started in 2007 but entered the wider public consciousness in September 2008 when Lehman Brothers filed for bankruptcy. The impact on the U.S. lubricants market was swift. Between September 2008 and the end of the recession (and recovery in U.S. lubricants demand) in March 2010, the cumulative reduction in U.S. lubricants consumption relative to expected (normalized) aggregate demand over that period amounted to 9.4 million barrels (or 1.3 million tons), equivalent to a loss of nearly 13% in expected demand over that time. By contrast, aggregate U.S. consumption of all refined products over that same period declined by only 4% relative to expected demand. A parallel assessment of the same crisis on global lubricants demand shows an aggregate loss of 7.3 million tons, or nearly 10% of expected consumption from mid-2008 to the end of 2009. This compares with a loss of only 3% in expected global refined products consumption over the same 18-month period.

chart 3 1Source: U.S. DOE/EIA

May we expect the same, but disproportionately large, impact on lubricants consumption as the consequences of COVID-19 extend and mature? Early market signals suggest that social distancing, travel bans, and the closure of non-essential businesses have depressed gasoline and jet fuel  demand most significantly; conversely, diesel use for on-highway transportation is largely fulfilling an essential service to the economy and should be less compromised, at least initially. So, by extension, do these same early signals extend to lubricants?

Presuming that we can take these initial signs as indicators, the early impact of COVID-19 may be felt most particularly in the passenger automotive lubricants segment. Less driving, social distancing, and the partial closure of dealerships and quick lubes may take a significant bite out of PCMO demand for oil changes, particularly in North America, which is far more dependent on the private automobile than most other countries. New vehicle purchases are likely to decline, as unemployment spikes and consumer confidence erodes, impacting OEM initial fill volumes.

Commercial and industrial lubricant consumption may react more slowly, in large part because a functioning economy depends on those segments to provide essential products and services (for example, food, healthcare, commercial transportation, communications, and government). But as unemployment rises, and GDP declines, the linkage to lubricants consumption, as demonstrated previously, is inevitable.

A very early assessment of the impact on global lubricants demand suggests that if COVID-19 has the same leverage on lubricants demand relative to fuels that we saw in 2008 and 2009, 2020 global lubricants consumption could drop by 15%-30% from 2019 levels. Prolongation of the pandemic into 2021 could adversely impact lubricants demand in that year but by lesser amounts.

The inference is that the lubricants industry will have a long, hard road ahead. Preparing for adverse outcomes of the significance implied by our preliminary prognostications should be top of mind for all leaders of lubricants businesses.

The next article in this series will focus on the impact of COVID-19 on the U.S. lubricants market.

Ian Moncrieff and Milind Phadke are Vice Presidents of Kline’s Management Consulting and Market Research divisions, respectively.

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