Lubricant industry declined 0.30% in 2018, says Chevron

Despite a robust growth during the first half of the year, the local lubricant industry slowed down during the third quarter of 2018, followed by a steeper decline of 9% in the final quarter.

Chevron Lubricants Lanka PLC Chairperson Rochna Kaul in the company’s annual report stated that due to weakened growth during the second half of 2018, a 0.30% year-on-year decline in growth was recorded for the full year compared to the year-on-year negative growth of 0.15% recorded in 2017.

According to the latest data available from the Public Utilities Commission of Sri Lanka (PUCSL), during 2017, 64,485 kilolitres of lubricants worth Rs. 26.5 billion were sold, 100 kilolitres less than in 2016.

“2018 was challenging as the economic growth rate slowed which then led to unfavorable market conditions for lubricants. The lubricants industry started the year on a positive note, posting growth of 6% in the first half of the year. However, the market weakened in the second half,” Kaul said.

The slowdown in the second half was driven by a number of issues including tightened monetary policies, contractionary fiscal measures, widening of BOP trade deficit, and political instability. In addition to these, depreciation of the rupee by approximately 16% against the US dollar during 2018 also had an impact on the growth of the industry.

The slowdown in the construction industry further weakened demand for lubricant products. Overall, the market was relatively flat year-on-year. Demand for lubricants from the construction sector slowed down during the year due to cash flow issues faced by the construction companies.

“While the construction industry suffered a setback due to liquidity issues, towards the end of 2018, tourism also faced challenges. The result was that overall consumers limited their discretionary spending, directly impacting most of the Sri Lankan economy,” Kaul further noted.

According to Kaul, the strong performance of hydropower plants in the second half of the year under review decreased demand for lubricants used for thermal power generation. The lubricant-intensive thermal power contribution to the national energy grid is expected to have declined during 2018 due to the consistent contribution of coal-powered energy and the considerable rainfall in the hydro catchment areas resulting in an increase in hydroelectric power generation.

The growth in the motor vehicle population declined marginally during 2018 to 6.6%, compared to 6.7% recorded during the previous year, creating an impact on industry growth. However, demand for lubricants from the agriculture and fisheries sectors are expected to have recorded growth relative to the comparative period, despite being disrupted by intermittent weather patterns.

Furthermore, she added that there are many issues that could be addressed if the lubricant industry in the country is formally regulated. The Public Utility Commission of Sri Lanka (PUCSL) is the Government appointed shadow regulator for the lubricants market. Kaul emphasised the importance of making PUCSL a fully-fledged regulator instead of a shadow regulator while commending the activities of the PUCSL.

“It is worth noting that PUCSL did undertake a number of measures to raise awareness among the general public in selecting reliable lubricants rather than falling prey to unlicensed players in the industry.”

According to PUCSL, legislative enactments are currently pending, which would enable the PUCSL to fully regulate the downstream lubricant market of the country.

Meanwhile, Chevron Lubricants Lanka PLC Managing Director/Chief Executive Officer Pat McCloud stated that the industry was compelled to raise the prices twice in the second half of the year to counter inflationary pressures.

“This was a difficult decision to make, yet necessary to restore lost margins. As expected, this move impacted sales volumes negatively,” McCloud said.

He added that retail customers opted for less expensive alternatives and decreased use of lubricants and there was also reduced demand from industrial customers, particularly from the construction industry, primarily due to challenges faced by that sector.

The structure of the lubricant industry remained unchanged during the year with 13 players, including three companies, that blend lubricants locally. These are Chevron Ceylon Ltd., Indian Oil Corporation,

Laugfs Holdings Limited, Exxon Mobil Asia Pacific Pte. Ltd., Ceylon Petroleum, Bharat Petroleum Corporation Ltd., Shell Markets (Middle East) Ltd., Toyota Tsusho Corporation, Lubricant Company Sinopec Corporation, Valvoline LLC, BP Middle East LLC, Total Oil India Pvt. Ltd. and Motul.

Altogether, 22 international lubricant brands from countries such as the US, UK, France, India, and China are operating in Sri Lanka. The lubricant market is regulated and governed under the provisions of the Petroleum Products (Special Provisions) Act No. 33 of 2002 and the Ceylon Petroleum Corporation Act No. 28 of 1961.