Brazil: Big, Complex and Growing

    When taking a deep look at the Brazilian lubricants market, trying to understand its peculiarities and the way it works and moves, one can easily become confused and probably will miss some details during the process.

    At first sight, this free market with strict rules seems to be something complex, but full of opportunities. We are talking about a lubricants market of 7.6 million barrels per year, spread over a geographic area of 8.5 million square kilometers, shared by 27 federative units. Considering that it has a population of around 195 million people, and a fleet of 35 million vehicles that has been growing more than 7 percent per year (even in this one, when GDP may not grow over 2 percent), one can conclude that the numbers for lubricants consumption have a clear upward trend.

    Another important point to consider is that the renewing of the vehicle fleet is happening so fast that the technical requirements for lubricants are pressing the market to offer more and more the highest quality of base stock and additive technologies. Motor oil categories like API SF and CF, and lower tiers, are expected to completely vanish from the market in a few months.

    In their place, the most recent engine oil classifications are being implemented simultaneously with the major markets in the world, making the need for API Group II and III base oils grow very fast. This automatically is boosting the business of imports, since Brazil itself does not yet make these base oils. The state-controlled Petrobras is the only native base oil producer, making API Group I at two plants (in Mataripe, with 1,750 barrels per day of capacity, and Duque de Caxias, 11,200 b/d) and some naphthenics at a third (Fortaleza, about 1,300 b/d).

    During the last national market meeting, called Encontro Com O Mercado (Meeting the Market) held July 4 in Rio de Janeiro, organized by Lubes em Foco magazine and the Brazilian Petroleum, Gas and Biofuels Institute (IBP), some data about the market and projects for new plants were presented by the main players.

    Petrobras showed details about its decision to redirect the project of its new Comperj refinery in Rio de Janeiro, to produce up to 2.23 million barrels of Group II base oils in 2016 – that is, more than 6,000 barrels per day. As well, the biggest rerefiner in the country, Lwart, is ready to start up its Group II plant with a capacity of 840,000 barrels per year (2,300 b/d). One can expect that the countrys other rerefiners will go in this same direction. Nevertheless, there are no projects on the drawing board for Group III yet, and this type of base oil will continue to be imported.

    Looking at the numbers presented at the July meeting, Brazils lubricants market registers around 3,000 different brands and grades of motor oils, 3,600 industrial oils, and something around 2,300 greases.

    Gauging from all these figures, there are 150 local producers, about 100 importers of lubricants and 19 rerefiners.

    The complexity of this growing market can be better perceived when we try to follow all the routes travelled over by a product and to understand all the legislation involved in each step of the process of marketing a lubricant, from the initial formulation to recycling.

    Despite the freedom of marketing issues like prices, importation, distribution channels, etc., there are some specific rules that must be followed by companies to be in the lubricants business in Brazil. This paradoxical situation allows us to say that it is a regulated free market, and it is growing healthily.

    The National Council on the Environment (known as CONAMA) has established the rules for recycling, stating in Resolution 362/2005 that the primary destination of used lubricants must be the rerefining process, and only in very specific cases could other destinations be authorized. The most important point in this regulation is that the responsibility for collecting the used oil in the market lies with lubricant producers and importers, and it must be done through the collectors agents properly registered at the Brazilian National Petroleum, Natural Gas and Biofuels Agency, commonly known as ANP.

    This means that a contract between a producer or importer and a collector must be presented to ANP before the company begins its activity, together with a commitment to collect a minimum percentage of used oil established by law for each region where the company will market its products.

    ANP is the governmental entity responsible for regulating the market and for establishing efficient links among the elements of this growing web. Its main purpose is to promote free and healthy competition and effective consumer protection. In this role, ANP has been acting in the market basically in three main areas: supply chain, quality, and control, often by issuing specific official Resolutions.

    For example, in 2007, ANP Resolution 10 established a requirement for prior registration of any lubricant product to be marketed. According to this resolution (which replaced 1999s Resolution 131), every company willing to have its products sold in the country must register each grade of product separately, showing all data about application, formulation and typical analysis.

    Importantly, Resolution 10 also establishes the minimum level of quality for automotive oils allowed for marketing in Brazil. From 2007 on, API SF and CF were set as minimum levels and all categories below those levels were prohibited.

    According to information disseminated during the July Encontro com o Mercado event, these levels will be soon updated to API SG for Otto engines and probably to API CG-4 for diesel engines, although CF may still continue to exist for a while. This upcoming Resolution to replace the 10/07 will establish new minimum levels, and is already being readied for publication very soon.

    In addition to the existing rules, in June 2009 ANP published five resolutions, numbered from 16/09 to 20/09, with the purpose of regulating all activities related to the lubes business. (See list at right.)

    Resolution 18 in particular is still stirring the lubricants market, because it establishes some rules that directly impact the small producers. In order to stay in business, it requires producers to have a minimum social capital, a laboratory able to perform some specific tests, and a review of the lubricant plant itself in order to meet some strict requirements for liquid storage, among other points.

    On the other side, Resolution 18 provides the possibility for a lubricant marketing company to have its products manufactured by a third party, since such parties will meet all the requirements. One can expect that the number of local registered producers will be much lower in the near future, compared to the number who were in the market of two years ago. However, the quality of products and the market as a whole are strongly expected to improve, according to ANPs experts.

    Despite being controversial or even somewhat challenging to the market, these resolutions normally are widely open for discussion with the industry, far before being published. It is a long process, beginning with ANP listening to all economic stakeholders involved, asking for suggestions and trying to give some guidance to the affected companies about the direction it is planning to go.

    The Lubricants and Lubrication Committee of IBP is one example of a forum for discussions involving most oil companies and technical consultants. They will spend a number of meetings examining issues that are the subject of official action, and will develop recommendations to ANP that can be used as technical support for the legislation.

    In 2006, in order to resolve an old claim from oil companies that were very concerned about the quality of lubricants in the Brazilian market, ANP launched officially its Program for Monitoring of Lubricants. This program consists of collecting samples of motor oils from several channels of distribution (mainly service stations) for checking, through laboratory analysis, whether they meet the claims of the labels and are registered accordingly.

    The first results of these tests could be considered as critical, as they exposed a lot of problems related to additives content, and made everybody very concerned about consumer protection and fair competition. This motivated ANP to continue with the Program. Nowadays, quality has improved and products from all over the country are collected. Everybody may find the results published at ANPs website bimonthly – and also can access a black list of products and producers.

    For example, the current report (see http://www.anp.gov.br/?id=624) shows 317 engine oils were collected for testing in July and August. Of these, 10.4 percent had irregularities in their registration; labeling errors were seen in 13.7 percent; and 13.7 percent had quality issues including insufficient additives, off-specification viscosity, or naphthenic base oil content. Some products had errors in more than one of these categories.

    According to several members of the IBP Lubricants Committee, the effectiveness of this program has brought resolve to the oil companies to support improvements in their processes, and to upgrade the minimum quality levels of the automotive oils sold in the market. After that, one can expect healthier and fairer competition among companies. The Monitoring Program may also help control actions in the field and bring punishment to those that choose inadequate paths to success. Thoughts about extending the program to other types of lubricants have been put on the table for discussion, and this could be a possibility for the future.

    The Brazilian lubricants market represents more than half of the total volume sold in South America, with a very strong automotive industry that keeps investing in new plants for new players, all betting on a market growing in a near future. To control it and set it free at the same time – and provide rules to meet technical and environmental demands – may be a big challenge leading to a complex interconnection among different categories of products and players.

    To live with such a paradox and maintain the whole apparatus running and improving is what makes it an exciting, unique and also very tough task for those who are part of the complexity of this growing market.