Ukraine in Turmoil

With an annual consumption of 350,000 to 400,000 tons, Ukraine is East Europes largest lubricants market, excluding Russia. Although base oil production ceased in the country a few years ago, Todorov said, Ukrtatnafta owns an API Group I plant in Kremenchuk with nameplate capacity of 5,800 barrels per day.

Ukraines lubricants typically meet only the former Soviet GOST specification, an obsolete standard, he said. However, before the countrys recent military and political crises, Ukraines renewed passenger car and heavy duty fleets were driving demand for higher quality lubricants and specialties. However, annual sales of passenger cars slumped from 610,000 units in 2008 to 169,500 units in 2009, and rebounded to only 237,000 units in 2012.

Until 2008, Ukraine was the regional champion for foreign direct investments in heavy industry, mining and other industries, but, Todorov said these ventures stalled with the political uncertainty and subsequent turmoil that ultimately led to conflict with Russia. Also, The countrys economic performance and GDP dropped after 2008, impacted by the economic crisis in Europe. And instability in the local currency is limiting the activities of foreign operators.

Aside from the current conflict, Ukraines economy faces many problems that hamper the operations of lubricant marketers. For example, Prista found the countrys macroeconomics are highly volatile and depend on a limited number of well-developed industries; namely, mining, metallurgy and agriculture. These sectors are Ukraines main export drivers and sources of foreign currency.

In addition, Todorov said, Ukraine is highly dependent on trade with Russia and lacks the investments necessary to modernize its technology. Also, foreign investors are challenged by complex legislation, red tape and interference from local administrations. And it is extremely prone to corruption, Todorov said.

While Prista found that Ukraine could be a potential driver for growth in Europe, deteriorating relations with Russia have had a severe negative impact on the economy. The market has shrunk three times since the economic crisis years. And the conflict with Russia also stalled investment opportunities, Todorov said. For example, Prista broke ground for a rerefinery project in Kiev oblast in October 2013, but has put the project on hold due to the escalation of the conflict with the pro-Russian insurgency in the countrys east.

Other obstacles include fast depreciation of the local currency, value-added tax refund delays for exporters and a banking sector badly in need of reform. Taking all these factors into account, Ukraine does not provide promising short- to mid-term growth prospects. Todorov concluded, We expect a long recovery period despite the aid promised by the United States, European Union and [International Monetary Fund].

Turkey at a Crossroads

Turkey is the largest lubricants market in the region, and its annual lubricant consumption has ranged between 420,000 and 500,000 tons in the last several years, according to Prista. However, the Turkish market has stagnated in the last two years because its economy is highly dependent on exports to the EU and neighboring markets that have experienced economic slowdowns.

According to the Turkish Oil Industry Association, the country has 255 facilities that produce lubricants, with a total production capacity of over 5.1 million tons in 2012. This overcapacity puts pressure on margins and supply in the market, Todorov said.

In a presentation at the ICIS Turkish Base Oils and Lubricants Conference in May, Selim Sanver, managing partner of Serem Petrol, said, Regulations concerning the importation of base oils into Turkey have been changed three or four times in the past two years, and sales were interrupted for several weeks as a result, he said. The changes were announced without prior warning to the industry, he said, so companies had to scramble to comply before they could import or ship product.

Todorov noted that the government recently introduced changes in legislation aimed at preventing the illicit mixing of base oil in diesel fuel, a situation caused by the significant import tax difference between base oil products and other petrochemicals such as fuels. He added that the Turkish tax system is used by some small producers to acquire an additional marketing advantage, which hampers the operation of the regular players in the lubricants market. He added that the countrys uncertain legal framework makes it difficult for lube marketers to do business.

Turkeys growth was negatively impacted by the global economic downturn and later by political turmoil that arose over the last couple of years, said Todorov, referring to antigovernment protests that began in May 2013.

Foreign investors appetite for financial exposure was reduced by the political and economic instability. Depreciation of the Turkish lira and extended payment terms are also limiting the growth of the lubricant marketers business development. Another important negative factor that caused the Turkish economy to stagnate is a drop in the number of public sector projects, a smaller number of capital developmental projects and the lack of liquidity in the market.

Over the last few years, Turkey has shown strong results in passenger car sales. The peak year was 2011, when almost 600,000 units were sold, nearly double 2008, Todorov said. In 2012, passenger car sales reached 556,000 in Turkey, and commercial vehicle sales reached 261,000, or around 10,000 units lower than the year before.

Romania Facing Slowdown

The Romanian lubricant market amounted to approximately 90,000 t/y in 2012, according to Prista. Well-developed metallurgical and automotive industries are among the main drivers of the countrys lubricant consumption. Demand has been almost constant over the last five years. Romania is a typical example of a market in transition from emerging to mature, and it has low expectations for further growth, Todorov said.

Prista found that during the last few years, the Romanian economy contracted, and the country implemented severe austerity measures to achieve financial stability. There is a lack of liquidity in the market, Todorov said, and public sector projects, which play a considerable role in the GDP, have been curtailed. Also, the European Unions financial crisis impacted negatively on the countrys economy.

As in the Ukraine, Romanian passenger car sales slumped drastically since the onset of the global economic downturn. In 2008, the countrys passenger car sales amounted to 285,000 units, and shrunk to only 66,000 units in 2012, Todorov said.

Looking for Markets

The economies of Ukraine, Turkey and Romania have their individual woes, and lubricant marketers from the region have to look elsewhere for growth opportunities, Todorov said. The main destinations for them should be Asia, the Middle East and Africa, according to Prista.

The growing economies of Asia and Middle East are considered a new wave of emerging markets. Their increasing lubricant demand cannot be satisfied by domestic supply, especially demand for high-tier products and specialties, Todorov said.

Central Asia, in particular, is gaining importance as an emerging market, noted Todorov. Demand in these countries will increase because of the growing need to develop local industries and infrastructure. In addition, consumers in these countries have a favorable image of imported products due to unsatisfactory domestic production standards, he said.

Despite the fact that Africa consumed only 1.3 million t/y in 2012, and holds a 5 percent share of global lubricant demand, its finished lubricant consumption is expected to have an annual growth rate of 3 to 5 percent, according to Todorov. This is due to the increased investments in production, infrastructure and fleets in the region, he concluded.

According to Prista, 80 percent of the demand in Africa is concentrated in five markets: Egypt, 460 000 metric tons; Nigeria, 230 000 metric tons; Algeria, 190,000 metric tons; South Africa, 240,000 metric tons; Morocco, 100,000 metric tons; and Angola, 80,000 metric tons.