Lubricant demand for road transport to peak within five years

公路运输的润滑油需求在五年内将达到峰值

Lubricant demand for road transport to peak within five years
Photo courtesy of Audi.

The global lubricants market was valued at USD118.89 billion in 2016 by U.S.-based market research and consulting company, Grand View Research. Asia Pacific accounted for 43% of global volumes. In a February 2018 report entitled Lubricants Market Size, Share & Trends Analysis Report 2018-2025 the company forecast the global lubricants market will reach USD166.25 billion by 2025 at a compound annual growth rate (CAGR) of 3.8%.

While this prediction paints a relatively positive outlook for the industry in the short to medium term, make no mistake, disruption is on the horizon. A December 2018 report by McKinsey & Company says road-transport lubricant demand is likely to peak within the next five years. The sector currently accounts for 40% of total lubricants demand.

Global sales of new electric vehicles in 2017 exceeded one million units, 66% were plugin hybrid electric vehicles (EV), the balance battery EV. McKinsey has previously estimated that the current growth trajectory producers could deliver 4.5 million annual EV sales by the year 2020, accounting for 5% of the global light vehicle market.

Volvo Battery Technology.
Photo courtesy of Volvo.

The rise in electrification will yield a slow decline in automotive lubricant demand, augmented by growth in ride-hailing services and extended oil drain intervals in modern internal combustion engine (ICE) powered vehicles. The McKinsey report suggests that marine, aviation, and rail transport demand will continue to grow throughout the reporting period — though the researchers acknowledge that volumes in these transportation sectors are less significant.

The McKinsey research includes granular projections to 2035 and suggests that growth opportunities are available to lube manufacturers despite the impending upheaval in road transportation technology.

One of the key findings was the opportunity for value-pool expansion. The report predicts a prodigious 44% growth in the global lubricants value pool by 2035. Historically, lubricant manufacturers have enjoyed high margins. This trend will endure with an increased penetration of branded or advanced products, typically synthetics, although the study emphasises that margins will vary by sector.

Synthetic lubricants will undergo a rapid expansion in road transport, achieving a 70% market share by 2035, which will prove profitable for the sector. Transport equipment and fast-moving consumer goods (FMCG) were identified by McKinsey as other potential fast-growing value pools.

Outside of the road transport sector, McKinsey underlines growth in lubes demand beyond the 2035 study timeframe. Non-transport and industrial lubricant consumption make up the lion’s share of lubricant demand and McKinsey expects growth in these sectors to continue, mirroring global GDP (gross domestic product) per capita increases. This demand growth will more than compensate for a drop in transport lubricant volumes.

However, it is a mixed bag when it comes to margins. McKinsey predicts that margins will “stagnate” in metalworking and transport equipment, which account for 30% of the global value pool, whereas FMCG and chemicals can expect healthy margin increases.

When considering your business strategy over the next two decades, “where to play matters,” says McKinsey. The report identifies highly variable performance by region. Emerging markets could add up to USD8 billion in market value by 2035 alongside a forecast 3% annual growth. More developed countries, on the other hand, will achieve a meagre 1% growth rate.

China remains the biggest drawcard for lubricant businesses, and the largest individual growth market, though improving margins from advanced formulations in OECD (Organisation for Economic Co-operation and Development) countries will precede similar margin improvements in China by five years.

Nevertheless, the report highlights margin and volume growth improvements across all sectors in non-OECD countries, with Asian countries the “largest, fastest-growing value pool.” In Europe and the Americas, slowing value pool growth is expected off the back of declining road-transport volumes.

Any projection is not without its risks. The McKinsey study is quick to highlight significant disruptions that could give cause to re-evaluate existing market projections and warns of the need to monitor technology and policy developments closely.

Volvo 360C Electric Vehicle.
Photo courtesy of Volvo.

The base case scenario of the McKinsey study projects that ICE vehicles and EVs will reach cost parity by 2025. Rapid advancement in battery technology is a key risk. A reduction in battery costs to below USD100 per kilowatt-hour by 2020 could fast-track EV adoption to 25% market share by 2035. The current projection is 15%.

An increase in green regulation that encourages industrial process improvements, greater recycling and a more circular economy could have a sizeable impact on industrial lubricant demand.

Whether it is necessary to own a vehicle in the future, due to advancements in technology and connectivity, is also a threat, primarily to lubricant margins. Millennials are already less enamoured with personal vehicle ownership than preceding generations, and we are witnessing growth in ridesharing, mobility services and fleet car usage. An earlier movement away from personal vehicle ownership could reduce advanced product margins by up to 15% as fleet buyers exercise greater bargaining power. A wholesale movement to fleets could heighten the risk of a collapse in the business to consumer (B2C) channel in automotive lubricants.

The combined impact of the three aforementioned risks of battery technology, green regulation and personal car ownership “could erode up to USD17 billion (35%) from the anticipated global value pool (USD49 billion) in 2035,” warns McKinsey.

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