At the corporate level, most international refiners and producers of finished lubricants have committed to sustainability, largely as a result of exposure to U.S. and European markets. Speaking at the ICIS Middle Eastern Base Oils and Lubricants Conference in Dubai in October, Apu Gosalia, vice president sustainability and global competitive intelligence at Fuchs Petrolub SE, said he was worried that in some instances sustainability has become an overused buzzword.

Why Sustainability Matters

Gosalia claims that in the mad dash to promote sustainability, the word has become commonplace and is in danger of becoming hackneyed, particularly in the media. At Fuchs, we prefer to think of it as continuous improvement, and there are a lot of drivers impacting the subject.

He cited the concept of Responsible Care, an initiative launched 30 years ago by the chemical industry that committed members to health and safety, environment, leadership culture and fair-trading standards. The charter has since been updated as new challenges like protectionism and health and safety issues have emerged. In early 2015, Fuchs chief executive officer Stefan Fuchs signed the responsible care global charter of the International Council of Chemical Associations.

Gosalia said there are other internal and external drivers of sustainability at Fuchs. Internally, they include the companys mission statement, competitiveness, credibility, employee loyalty, efficiency, capital access, employer branding and quality improvement. Externally, the drivers include shareholders, customers, investors, analysts, society, government, nongovernmental organizations, media and especially future generations.

Sustainability demands a framework, Gosalia said, yet many companies use the word as a greenwashing tool, solely for public image. Nevertheless, even with a deep corporate commitment, he said it is frequently impossible to have projects that satisfy economic, ecological and social responsibility in equal measure.

Fuchs has adopted the term sustainable corporate control – a process of internal control and improvement that, wherever possible, adds a sustainable component to given processes. We try to achieve the honey-spot of eco-efficiency, which combines economic, ecological and social obligations. In the last two years, all of Fuchs blending plants worldwide that buy energy were instructed to examine whether the optimum mix of energy is being brought in.

Whenever you switch from electricity to gas, you do two things at the same time. In most parts of the world, gas is up to 30 percent cheaper than electricity, and the carbon footprint that gas leaves behind is half that of electricity, Gosalia explained. Fuchs is conducting that sort of evaluation company-wide to increase overall sustainability.

The subject of sustainability is not going to go away, he believes, citing the example of resource depletion illustrated by the Happy Planet Index. The index details the consumption of resources, measured as number of planets. The Middle East is a heavy user of water and energy and is vividly exemplified by the U.A.E., which according to the index is consuming more than nine planets.

Fuchs publishes a sustainability report in its annual report with details of key performance indicators for carbon footprint, water and energy consumption, as well as waste generation per lubricant ton produced. So far, Fuchs is the only lubricant company that has published these figures, and it is important other lube manufacturers consider something similar, said Gosalia.

Effects of Counterfeiting

Perhaps less obviously associated with sustainability is the growing issue of counterfeiting, a particularly prevalent problem in the Middle East. According to Gosalia, counterfeiting causes a lot of harm to the sustainability of businesses and has economic and social repercussions that often result in job losses. Bad oils and bad lubricants cause environmental as well as health and safety problems.

In the Middle East/North Africa region, he said, trade in fake lubricants is already widespread, and the trade in substandard oil is ballooning. Regulators in the U.A.E. are concerned about the country being a springboard for a growing supply of substandard products sold into West Africa. There are estimates by the Ministry of Commerce in Saudi Arabia that the country may have a significant percentage of counterfeit products in its lubricant market, said Gosalia.

Counterfeiters are attracted to high-quality oils and fast moving products or products without anticounterfeiting measures. In the Middle East, the problem is compounded by the easy availability of used oil due to sporadic regulatory oversight over the collection of waste oil. Gosalia contended that governments in the region must take a stronger position to head off counterfeiting. Governmental actions are too lax, although they are increasing.

Consumers also need to be better informed so that they understand the consequences of using substandard lubricants. Naming and shaming or black lists of lubricant brands that do not meet acceptable standards is another way to limit the encroachment of counterfeit products, according to Gosalia.

Global Lubricants Market

Sustainability is inextricably linked to consumption. Prior to the 2009 financial crisis, lubricant demand, excluding marine lubricants was approximately 36 million tons per year. With the onset of the recession, the figure fell around 10 percent but was more acutely felt in more established markets.

Some regions like Western Europe were hit harder, with the market dropping more than 20 percent in some countries. Although the market recovered in 2010, only in 2014 did the market returned to pre-crisis levels. However, Gosalia said the underlying regional dynamics have changed markedly, and Asia-Pacific together with Africa and the Middle East now account for more than 50 percent of total consumption.

This is a result of growing industrialization in emerging markets with more lubricants consumed. In mature markets, there is a continuous drive to higher quality lubricants, which means longer drain intervals and fewer lubricants consumed, he noted. The most recent comparison assessing the change in 2014 vs. 2013 showed the strongest growth in the Middle East, which recorded a 4 percent increase compared with a global average of 0.4 percent.

In the next five to seven years, Gosalia believes there will be exponential growth in the Middle East, supported by key sectors like the steel industry. The Middle East is now the third largest market in terms of per capita consumption. Indeed, for the first time, three Middle East countries – Iran, Egypt and Saudi Arabia – are in the top 20 ranking of lubricant-consuming countries. There is a volume growth in the Middle East, and Iran and Saudi Arabia already account for two-thirds of total Middle East volumes, Gosalia said.

Despite a mostly positive outlook for lubricants in the Middle East, certain constraints could hinder or even reverse growth. Unquestionably, significant industrial expansion is one of the main drivers of lubricant consumption as are rising disposable income and a burgeoning aviation sector. However, growth could be derailed by the regions spiraling political and social unrest.

Another factor is the reverberations from the nuclear agreement struck with Iran. If implemented, the agreement will quickly allow Iran to return to oil markets, which will likely dampen crude prices even further. Given that Saudi Arabia and Iran are the two biggest lubricant markets in the Middle East, it is unclear how the former will counter the latters increased oil output. As Gosalia pointed out, regional uncertainty may lead to economic instability.

Perhaps a less obvious constraint on growth is lack of knowledge by consumers about lubricant choice and oil change intervals. To some extent, increased regulatory oversight and environmental awareness has improved consumer understanding, which is positive for growth, he said. If you look at the investment in the Middle East construction industry and manufacturing industry, something is changing. There is a push toward higher performance and synthetic lubricants.

Competitive Landscape

About ten years ago, Fuchs undertook a study to evaluate the structure of the global lubricants industry. The research identified 1,700 competitors globally with annual production volumes over 1,000 tons. Today, the fundamental structure of the lubricants industry has changed, said Gosalia. There has been lot of consolidation, and the number of lube manufacturers came down by more than 60 percent.

Consolidation has been particularly prevalent among independent lubricant manufacturers where the number of companies was halved between 2000 and 2005, according to Fuchs analysis. In 2014, the top ten lube manufacturers accounted for more that 50 percent of global lube consumption. There was a significant number of merger and acquisitions in 2014, with 21 deals.

Fuchs identified six drivers that increased activity, and key among them was the exit of a number of large vertically integrated oil companies from the lubricants business. Equally, new participants decided to enter the lubricants market, and oil majors like Gulf Oil and Pertamina have restructured by spinning off their lubricants business as stand-alone entities.

Gosalia also pointed to the globalization and glocalization of national oil companies, expanding outside their local markets. If you think of SK in Korea or Sinopec in China, these companies are becoming dominant in their home markets but are also moving into international markets.

Companies allied to the lubricants sector are also consolidating – a development Gosalia described as vertical integration. He cited Lubrizol, which decided to expand its presence in the sector by acquiring Chemtool.

A lot is happening in the competitive landscape, which will not make life easy for any lubricant manufacturer, Gosalia said. But there is always room for small specialized lube manufacturers. Fuchs itself made four acquisitions in the last 18 months.

The changes in the competitive landscape have altered the ranking of the top 20 lubricant companies worldwide. These manufacturers account for about two-thirds of the global market and the top ten for around 50 percent, Gosalia said.