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, 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
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
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
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.
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