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EDITOR’S NOTE

Topics Covered The magazine tracks developments under three topics:

Global/Regional Finished Lubricants Market • Developments in a Slow Growth Global Lubricants Market • Increasing On-Highway Activity Proffers Growth Opportunities in North American Commercial Automotive Lubricants Market • Lubricants Market of the Middle East Remains Resilient Amid Economic Downturn

Product Developments and Trends • Electric Vehicles and Shared Mobility are Structurally Changing the Automotive Engine Oil Market • OEM Genuine Oils Intensify Competition in a Slow Growth PCMO Market • Commercial Use of Two Wheelers and Changing Rider Demographics Shape the Global Motorcycle Oils Market • Opportunities in a Declining Marine Lubes Market

Global Basestocks Market • The Changing Face of the Basestocks Market • Polyisobutylene: A Crucial Building Block for the Lubricants Industry

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Innovation, differentiation, and flexibility are the keys to succeed in the constantly evolving basestocks and lubricants industry. The industry is likely to see fundamental changes in how industry participants do business as a result of changing technology, regulations, lubricant quality and specifications, supply chain, and consumer behavior. At Kline, we help our clients by keeping tabs on this industry through our research reports. In 2018, we published many reports covering these new topics in addition to our well-recognized report titles. The global finished lubricants market continues to struggle to grow substantially in volume due to shift towards longer-lasting lubricants. However, the market outlook is underlined by some interesting developments, such as shifts in viscosity grades, improving emission norms in developing countries, and the growing use of synthetics. Read more about these trends in our reports Global Lubricants: Market Analysis and Assessment and Global Synthetic Lubricants: Market Analysis and Opportunities. Global lubricants demand is led by the United States, where the commercial automotive lubricants market is emerging as a bright spot in an overall declining automotive lubricants market. The report Opportunities in Lubricants: North America Market Analysis explains the factors that are augmenting market growth and discusses what the future holds for this segment. The global PCMO market will experience disruption brought about by such emerging technologies as electric and autonomous vehicles and shared mobility options. The report PCMO Market in 2040: A Long-term Outlook provides an assessment of the impact of these disruptive technologies on the global PCMO market. Among these market developments, passenger car manufacturers are expanding their revenue stream by monetizing customer loyalty in the lucrative aftersales lubricants market. They are increasingly capturing market share by offering genuine oils. Our OEM Genuine Oil Brands and Programs in the Consumer Automotive Segment: Market Analysis and Opportunities report discusses how this trend is intensifying competition for lubricant suppliers.


The two-wheeler lubricants market, though not untouched by the emerging technologies mentioned above, is a bright spot in an otherwise slow-moving finished lubricants market due to its fast growth in developing economies. Our report Two-Wheeler Lubricant Brands and Consumer Insights helps in understanding the consumer lubricant purchasing and brand selection process in select two-wheeler lubricant markets. A companion report Lubricants for Motorcycles, Scooters, and Mopeds: Global Market Analysis and Opportunities highlights the opportunities and challenges for lubricant marketers in the global two-wheelers market. Another interesting topic covered in this magazine is polyisobutylenes (PIB). PIBs find extensive usage in the lubricants industry either as a precursor to lubricant additive manufacturing, as a lubricant basestock or thickener. The report Business Outlook for Polyisobutylenes: Global Market Analysis and Opportunities provides a comprehensive assessment of the business opportunities, challenges, and threats in the global PIB market. Keeping up with our efforts to remain relevant to our clients by bringing in new and interesting content, we plan to publish the following reports in 2019 besides many others. • Lubricants Market Profiles for Select Markets in Latin America and Africa • The HDMO Market in 2040: A Long-term Outlook • OEM Genuine Oil Brands and Programs in the Heavy Duty Commercial Segment: Market Analysis and Opportunities • Natural Gas Engine Oils: Global Market Analysis and Opportunities

For a catalogue of recently published and upcoming titles, go to: Energy/petroleum market research reports

MILIND PHADKE Milind.Phadke@klinegroup.com Vice President, Energy Practice Kline Market Research

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DEVELOPMENTS IN A SLOW GROWTH GLOBAL LUBRICANTS MARKET

Lubricants are products that are used for reducing friction between moving parts and are widely used in vehicles and industrial equipment. Though these extremely important fluids are needed to maintain vehicles and equipment in good working condition, they also add a substantial cost to consumers’ overall vehicle or equipment maintenance cost. Therefore, globally, there is a desire among lubricants users to reduce its consumption by prolonging its use but without compromising equipment performance. This forms the crux of the developments that are currently taking place in the global lubricants market. The shift toward longer-lasting synthetic lubricants and designing of equipment with smaller sumps are a result of the trend of optimizing cost. This, along with expanding alternate fuel vehicles that do not require lubricants and emission and fuel economy norms, will shape the future market of finished lubricants. This article, based on the findings of our research studies, Global Lubricants: Market Analysis and Assessment and Global Synthetic Lubricants: Market Analysis and Opportunities, discusses the developments that shape the global finished lubricants industry.

Global Lubricants Markets to Grow Despite Slowdown in Major Markets Global demand for finished lubricants is estimated at 40 million tonnes in 2018 with Asia-Pacific in the leading position. North America is the second-largest lubricants-consuming region with about one-fourth of global demand. In Asia-Pacific, demand is led by China, followed by India; in North America, demand is led by the United States, which is the largest lubricants-consuming country globally. These three countries, along with Russia and Japan, account for more than half of the global finished lubricants demand. The United States and China, because of their sheer size, have the biggest impact on volumetric global lubricant demand, product trends, viscosity grade evolution, synthetics penetration, channel shifts, and supplier positioning. The year 2017 saw changes in the global ranking of countries. For example, Mexico surpassed Canada and joined the list of top 10 lubricant countries. Similarly, Turkey surpassed France and joined the list of top 15. Passenger car motor oil (PCMO) and motorcycle oils (MCOs) are the most consumed lubricant types with a combined share of about one-fifth of the global demand. Heavy-duty motor oil (HDMO) is the second most-consumed lubricant, closely following PCMO and MCO. Therefore, trends in PCMO and HDMO significantly influence developments in the overall lubricants and basestocks industry. www.klinegroup.com

“Global finished lubricants consumption will have a minimal volumetric growth in the future, ranging between 41 and 42 million tonnes by 2022.”


Global finished lubricants consumption will have a minimal volumetric growth in the future, value ranging between 41 and 42 million tonnes by 2022. Historically, the Asia-Pacific region has been one of the fastest-growing markets; however, in the future, the region is expected to expand much more gradually. South America, and Africa and the Middle East (AME) regions, will grow the fastest through the period 2018 to 2022. North America’s demand will shrink marginally, while Europe’s demand will remain almost stable. Market developments related to the lubricants market of the United States and the Middle East have been discussed separately in two articles that are based on reports titled Opportunities in Lubricants: North American Market Analysis and Opportunities in Lubricants: Middle East Market Analysis. CAGR, %

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0

Forecast Finished Lubricant Growth by Region, 2018 to 2022

Region A Africa, Middle East

Region B Region C South America Asia-Pacific w Commercial

x Consumer

Region EuropeD y Industrial-a

Region E North America

Region GlobalF

z Total

Basestock Market Trends Influence Lubricant Formulations

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Penetration of Synthetic/Semi-synthetic Lubricants by Region and Segment, 2018 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Europe a

North b America

Asia-Pacific c

South d America

Africa Industrial e and Consumer f g oils Commercial h Middle East automotive and fluids automotive

Regions Synthetic

Semisynthetic Semi-synthetic

i Total

Market segments

NOTE: Excludes process oils.

Top 10 Suppliers Capture Half of the Global Lubricants Market The global finished lubricants market is fragmented with the top 10 suppliers accounting for close to half of the market. The remaining half of the market is served by a myriad of suppliers. Suppliers of finished lubricants are classified into three distinct groupings based on their estimated volumes sold, reach and distribution, and overall size and scale.

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ers. It has been observed that some suppliers’ full synthetic PCMOs can be classified into a two-tier space: an existing established brand and a new top-tier or premium category. These companies advertise their premium categories as higher-quality full synthetic PCMOs by highlighting benefits such as advanced cleaning, longer drain intervals, and improved fuel economy. Further product differentiation with three-tier classification has been seen in mature markets, where the first tier includes an entry-level full synthetic offering. These oils are synthetic basestock versions of conventional products featuring similar basic approvals. The idea behind launching an entry-level full synthetic is to compete with mid-tier and low-tier, private-label, and other suppliers that compete mainly on price.

“Shell not only leads in the global lubricants market but also in the global synthetics lubricants market (excluding process oils) in 2018. ” Estimated Global Finished Lubricant Market Share by Leading Top 10 Suppliers, 2018 Shell

ExxonMobil

BP All other TOTAL Chevron PetroChina

Lukoil

FUCHS

Sinopec Idemitsu

Total: 40 million tonnes

Market Developments to Watch Online sales of lubricants While the Internet continues to change everyday life, it is worth mentioning that the finished lubricants market is no longer a brick-and-mortar business with the entry of e-commerce giant, Amazon. The company launched its private-label PCMO product line in July 2018 in the United www.klinegroup.com


INCREASING ON-HIGHWAY ACTIVITY PROFFERS GROWTH OPPORTUNITIES IN NORTH AMERICAN COMMERCIAL AUTOMOTIVE LUBRICANTS MARKET Commercial Automotive Lubricants Unveil Opportunities Amid a Declining Automotive Lubricants Market in North America The commercial automotive lubricants segment in North America emerges as a bright spot in an overall declining automotive lubricant market. After experiencing a slow but positive trend during the post-recession years, the North American automotive lubricant demand has been decreasing, particularly over the past two to three years. This downtrend is principally driven by the contracting demand in consumer lubricants segment due to increasing penetration of long drain interval synthetic engine oils. Amid a declining automotive lubricant market, the commercial automotive lubricants segment is experiencing growth, driven by growth in commercial activity in North America. North American Demand for Automotive Lubricants, 2017

10% 11%

8% 11%

Consumer automotive lubricants

UnitedaStates Mexicob Canadac

Commercial automotive lubricants

81% 79%

“The commercial automotive lubricants segment in North America emerges as a bright spot in an overall declining automotive lubricant market. � www.klinegroup.com


ELECTRIC VEHICLES AND SHARED MOBILITY ARE STRUCTURALLY CHANGING THE AUTOMOTIVE ENGINE OIL MARKET The global passenger-car motor oil (PCMO) demand in the long term (up to 2040) is expected to remain flat or decline slowly. While on the face of it, the outlook is grim, the future holds opportunities as well as challenges to lubricant suppliers and original equipment manufacturers (OEMs). In recent years, the market has started feeling the impact of increasing penetration of electric vehicles (EV), growth in ridesharing/ride hailing apps, and the emergence of vehicle subscription services. In light of these developments, this article discusses the current state of the PCMO market and its long-term outlook to 2040.

EVs Are Emerging as an Alternative to Internal Combustion Engine Vehicles The EV market has seen accelerated growth in the current decade due to advancement in technology. It is dynamic and highly influenced by government regulations, as well as technology advancement and availability of necessary charging infrastructure in a country. EVs in comparison to internal combustion engine (ICE) cars are more expensive; therefore, government support in the form of favorable polices and subsidies is the main growth driver for these vehicles. It is expected that with gradual penetration and market acceptance, EVs will become affordable to broader population. However, the industry faces difficult headwinds due to insufficient charging infrastructure and high battery pack costs, which represent one of the largest cost components for EVs. Global passenger vehicle population in a select 15 countries (covered in the study The PCMO Market In 2040: A Long-Term Outlook) is estimated at 830 million units in 2017. These countries constitute more than 65% of the world passenger vehicle population, more than 90% of the global EV population and are the largest PCMO markets around the world. Out of these 15 countries, the United States, Japan, the United Kingdom, and France together account for 90% of EV population. Among the different EV options available in the market, battery EV (BEV) and plug-in-hybrid EV (PHEV) are still a niche market. Hybrid EV (HEV) has a higher market penetration in countries like the United States, Japan, and the United Kingdom. HEV technology, as the name suggests, is a hybrid of electric propulsion system with ICE. www.klinegroup.com

Share of Different Engine Technologies in Select 15 Countries, 2017 and 2040 100% 90%

E EV

80% 70% 60% 50% 40% 30% 20% 10% 0% ICE

2017 EV

2040 BEV

PHEV

HEV

Note: ICE includes diesel, gasoline, biofuel, and natural gas. The countries included are France, the United Kingdom, Japan, China, the United States, Canada, Germany, Australia, South Korea, India, Mexico, Russia, Brazil, South Africa, and Saudi Arabia


MCO Market Overview Lubricants used in two wheelers, including motorcycles, scooters, and mopeds, are known as motorcycle oils (MCOs). MCOs include engine oils, suspension oils, fork oils, gear oils, chain oils, and greases. Global MCO demand is estimated at 1,400-1,500 kilotonnes in 2018. A significant share of the market is concentrated in one region, Asia-Pacific. Engine oil accounts for the lion’s share of the MCO market, because other lubricants such as fork oil and suspension oil are used mainly as factory fill and are seldom replaced in a two wheeler. Global Demand for MCO by Region, 2018

Europe x% North America x% Asia-Pacific x% South America x%

Rest of the World x%

Total: 1,400-1,500 kilotonnes As most of the two-wheeler lubricants market is concentrated in the developing markets where customers are price-sensitive, conventional engine oils occupy about three-fourths of the total market. Europe has the highest penetration of synthetic products in terms of percentage, while Asia-Pacific is the largest consumer of synthetic lubricants in absolute volume. The MCO market in the key countries (Brazil, China, Colombia, Germany, India, Indonesia, Italy, Malaysia, Mexico, the Philippines, Thailand, Spain, the United States, and Vietnam) is highly fragmented, with the top five players accounting for about one-third of the market. BP and Shell are the market leaders in the MCO market of these countries. These two suppliers have strong market positioning in Asia-Pacific, the largest MCO market. BP is also among the top three suppliers in Italy, Germany, Spain, and the United States.

“BP and Shell have strong market positioning in Asia-Pacific, the largest MCO market”

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Two-Wheeler Population by In-Service Activity in Key Countries, 2018 India India Thailand Thailand Malaysia Malaysia Vietnam Vietnam Indonesia Indonesia China China Philippines Philippines Spain Spain Colombia Colombia Italy Italy Brazil Brazil Mexico Mexico Germany Germany United States United States 0% 0%

10% 10%

20% 30% 40% 20% 30% 40% Transportation Transportation

50% 60% 50% 60% Business Business

70% 80% 70% 80% Recreational Recreational

90% 90%

100% 100%

Vehicle Use and Maintenance Practices “ Low awareness about products, lack of technical proficiency, and easy availability of services are the main reasons for the popularity of DIFM�

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Lubricant Basestock Trade Continues to Grow Substitution of Group I is not enough for Group II and Group III suppliers—they have to look for business in export markets as well. While the basestocks industry has always been a global industry—trade flows have expanded at a rapid pace due to the capacity build up. Two examples—Group III flow into the United States and Group II flow into Europe have been very illuminating. This is Kilotonnes especially so because the United States has practically no Group III capacity, and Europe, until now, had very little Group II capacity.  Basestocks Imports by EU-28 Region from the United States, 2007 to 2018 Kilotonnes

900 800 700

Chevron’s Pascagoula plant commenced operation

600 500 400 300 200 100 0

2007

2008

2009

2010

2011

2012

2013

2014

a- Includes imports only for the period January to November 2018. SOURCE: Eurostat. www.klinegroup.com

2015

2016

2017 2018-a


Group II exports from the United States (it is assumed that the trade flows represent largely Group II, as Group I exports would not make economic sense) to EU-28 exploded after Chevron’s Group II plant in Pascagoula started commercial production. A similar trend is seen in the Group III imports by the United States from the Middle East. With new capacity addition, Group III imports to the United States have grown. Continued growth in these trade flows will depend on demand growth and supply creation in the destination markets. Europe will see a new Group II plant in 2019. It remains to be seen what the impact will be on Group II exports to the region. Similarly, if the United States gets a Group III plant, this could impact the current flow of Group III to the country. Group III/III+ Basestocks Imports by the United States, 2007 to 2018

Market Structure Is Changing The divergence of supply and demand trend lines increases the surplus and makes the basestocks market a buyers’ market. In addition, increasing lubricant quality and proliferation of specifications means that blenders require a wide variety of basestock to blend their products, which also allows them to cater to niche markets, such as bio-sourced or re-refined basestocks. As a result, vertical integration between basestocks manufacturing and lubricants blending does not make sense any longer. Between 2007 and 2017, basestock plants that can be classified as being largely merchant suppliers increased from 64 to 72, with an incremental basestock capacity of 10 million tonnes. In the same period, vertically integrated plants fell from 52 to 38. An increasing number of merchant marketers increases competition in the basestocks market and adds to the price-driven competition. This is also the period that saw growth in the number of independent lube blenders in various growth markets around the world. The proliferation of synthetic and semi-synthetic lubricant products from different categories of lube marketers is a testament to this change.  www.klinegroup.com

“Between 2007 and 2017, basestock plants that can be classified as being largely merchant suppliers increased from 64 to 72, with an incremental basestock capacity of 10 million tonnes. ”


How Have Basestock Suppliers Responded? Basestock suppliers continue to expand the performance and physical characteristics of the basestocks they produce in an effort to increase the universe of applications that they can serve. There are several examples of this: Group II/II+ suppliers

Re-refined basestocks

Group III/III+ basestock

Group I basestocks

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POLYISOBUTYLENE: A CRUCIAL BUILDING BLOCK FOR THE LUBRICANTS INDUSTRY

Polyisobutylene (PIB) is a versatile petrochemical. It plays important roles in lubricant manufacturing. In this article we take a look at the evolving PIB market.

Consolidated Supply Landscape of PIB Market What is PIB? PIB Is a liquid or semi-solid vinyl polymer formed by the cationic polymerization of isobutylene, but the raw materials may also include a mixture of isobutane and isobutylene, and fractions of C4 hydrocarbons along with isobutylene. PIBs can be of two types: high reactive (HR) PIBs and conventional PIBs. HR PIBs have a higher percentage of exo-terminal carbon-to-carbon double bonds (C=C), which makes them more reactive. In contrast, conventional PIBs have a lower percentage of exo-terminal C=C, which makes them relatively lesser reactive than HR PIBs. PIB is used as a precursor for the manufacture of lubricant additives as a lubricant basestock and as a thickener. On the basis of molecular weight, PIBs are sub-divided into several grades: es:

HIGH MID

>2,300 and <= 8,500

>=1,000 and <= 2,300

LOW <1,000 www.klinegroup.com


Kline is a worldwide consulting and research firm dedicated to providing the kind of insight and knowledge that helps companies find a clear path to success. The firm has served the management consulting and market research needs of organizations in the agrochemicals, chemicals, materials, energy, life sciences, and consumer products industries for 60 years. For more information, visit www.KlineGroup.com.

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