4 Base Oils Supplement | February 2010 | www.icis.com

BASE OILS 2010 OVERVIEW

THE RECESSION of 2009 had many casual-ties. One that will likely not be lamented is

bination of large, fast-growing economies was a great buzz-word, but never made any sense.

Russia, India and China – could not

Clubbing them together clouds one’s thinking on these economies and is in fact dangerous, if taken seriously.

enced the global recession to varying

the lubricant and lubricant base stock mar-kets in these countries has also been varied.

EFFECT OF THE DOWNTURN

countries has varied in both magnitude and

China and India barely slowed down. Brazil, like Russia, went into a recession, but the contraction was much milder in comparison with the latter.

Even with these data it would be wrong to

Global recession a�ected the economies of the BRIC countries di�erently. To take a somewhat contrarian viewpoint, perhaps the idea of the BRIC bloc should now be laid to rest

MILIND PHADKE/KLINE & COMPANY

REX

FEAT

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S/CH

RIS

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www.icis.com | February 2010 | Base Oils Supplement 5

assume that India is like China, or that Brazil is a milder version of Russia.

Russia is an export-oriented economy. Its health and growth depend on exports of oil, metals and other commodities. Prior to the recession, the Russian economy had over-heated as a result of high oil prices.

private companies chalked up nearly $500bn (€355bn) in external debt – a phenomenon supported by the easy monetary conditions in North America and Europe. With crude oil prices coming down and foreign credit drying up, the economy collapsed.

Over the past few decades, Brazil has developed from being an agricultural economy to an industrial one. However, agriculture and natural resource exports are still an important driver for growth. Brazil escaped the worst impact of the recession on account of two factors.

First, the banking sector in Brazil is largely government controlled and as a result more conservative. It had limited exposure to the US sub-prime loan market. Second, China has replaced the US as Brazil’s largest export

on the back of the Chinese upturn. As indi-cated in , industrial produc-tion in Brazil tracks Chinese exports with a three month lag.

India is a “Goldilocks” economy – neither too dependent on export-driven growth (as are China and the East Asian tigers), nor too reliant on foreign money for investment-driven growth (such as Russia and a few other countries in Eastern Europe). As a result, the impact of the recession on India has been neither severe nor sustained. In the

the Indian stock market, leading to a drop in

dence has returned and along with it foreign

creating excessive liquidity, leading to fears that a housing bubble might be created.

supported by an undervalued currency. With its chief export markets contracting,

stimulus. However, it is at crossroads. With Western consumers cutting spending, at least in the immediate future, the country

Investment-led growth is unlikely to be

excess capacity, resulting in a poor return on

capital. Growth in the long term will have to come from increasing domestic consump-

ment is following a loose monetary policy to stimulate growth, but the fear is that this will lead to a new housing bubble in China.

DEMAND DROPPING Lubricant consumption in BRIC countries dropped by between 12% and 18% as a result of the recession. Consumption is projected to recover to 2008 levels by around 2011, as

cantly from a 25–30% drop in Russia to a 10–15% drop in China and India.

Russia was one of the countries most

in the country has been driven by energy exports as well as investment growth, in turn fueled by foreign money. As a result, the country was doubly hit by the recession. Industrial production, construction, min-ing, and automotive production were all

tion of industrial and commercial lubricants

2009. Consumption of consumer lubricants

use – a result of high unemployment and the prevailing economic pessimism.

Suppliers of imported lubricants fared worse than domestic suppliers, as they have

much of their costs in foreign currency and, with the depreciation of the rouble, their abil-ity to compete was reduced.

imported lubricants is supplied through workshops and dealers of imported cars.

distress as they have large inventories of

their ability to obtain and sell lubricants.

among the BRIC countries to recover as a

and the overall business pessimism.

industrial production and exports were down by 13% and 23% respectively com-

the country is pulling itself out of recession on the back of exports to China. As the most recent available data show, industrial production picked up in the second half of 2009 – growing at nearly 6% over the second half of 2008.

As a result, consumption of industrial and commercial lubricants was down by 15–20%

close to prerecession levels by the end of the

(which declined by around 8%) was much milder because of a government subsidy on car sales, as well as the fact that ethanol prices did not rise as much as gasoline. Hence, there was no major impact of high fuel prices on car driving.

India experienced a mere slowing down in growth rates because of the recession. Of course, there was a period of panic when

exposure to it was not clear. However,

SOURCE: IMF, THE ECONOMIST

GDP GROWTH IN BRIC COUNTRIES

**90023Q 90028002 2009 Q22009 Q1

% change*

-15

-10

-5

0

5

10

15IndiaRussiaChinaBrazil

NOTE: *Change over same period previous year**Estimates for full year

SOURCE: KLINE & COMPANY

LUBRICANT CONSUMPTION BRIC COUNTRIES

m tonnes

7

8

9

10

11

2011201020092008

Pessimistic

Optimistic

Most likely

“Brazil has developed from being an agricultural economy to an industrial one

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6 Base Oils Supplement | February 2010 | www.icis.com

BASE OILS 2010 OVERVIEW

this was short-lived. Growth in industrial production was never negative, even at the height of the recession. In the short term, the automotive and construction industries

Milind Phadke is an industry manager at Kline & Company’s energy practice. He is based in Kline’s India of�ce and is responsible for the company’s syndicated market research reports in the areas of �nished

lubricants, lubricant basestocks and lubricant additives. Milind has over 14 years’ industry experience in petrochemicals, polymers and downstream petroleum products. He holds a degree in Instrumentation Engineering from India’s Marathwada University and an MBA from the Indian Institute of Management in Ahmedabad.Read Kline’s latest study on lubricants in the BRIC economies www.klinegroup.com .

result of the contraction in its export mar-

one point, the impact was more severe than in India. With the help of a $600bn (€425bn) stimulus package, the country has clawed its way out of recession. However, lubricant consumption for 2009 will be 12% lower compared with 2008 – with the industrial and commercial lubricant markets experi-encing the worst declines, followed closely

facing the country is to replace exports with domestic consumption to drive growth.

BEYOND COMPARISONIt is clear that the BRIC countries are all very

them as a bloc does not make sense. Russia is the weakest growth prospect and the country really does not belong to any high

has been driven mainly by energy exports. Its recovery is linked to the recovery in Europe, as well as other non-economic fac-

all BRIC countries. Both Brazil and India escaped the worst

impact of the recession, not because of any

sector in these economies is partially closed. India has managed to get back on the growth track by virtue of strong domestic demand. Brazil, on the other hand is trying to export its way to growth, focusing this time on China and India, rather than the US.

China’s growth needs a new sponsor, now that Western consumers will take a long time to recover consumption levels. Growth in domestic consumption can be the new driver for the Chinese economy. It remains to be seen if Chinese consumers are up to the challenge.

BASE OILS 2010 OVERVIEW

largely untouched. As a result, lubricant consumption in the industrial and com-

of 2009, but it is already back on the prere-cession growth trajectory.

Finally, China experienced a rather severe

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