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Energy: Friction fights lubricants

Oct 10, 2001

The screws have been tightening over the lubricants market over the past eighteen months. The industry witnessed an estimated de-growth of 12% in FY01. This sluggish performance has continued into the current fiscal. The lubricants industry is estimated to have contracted by 16% in the first five months of the current fiscal. Murphy's curse seems to be playing on the sector. Besides consumption under severe pressure, feedstock prices -- base oil -- have been ruling high with oil markets rallying over the past two years. This has led to a double whammy on operating profits with sales taking a hit and margins being squeezed. The industry, like others, will be hoping for a lower oil price regime.

The challenges do not end there. Competition in the sector has heated up with international companies featuring in the players' list, which include Shell, Pennzoil, Tide, Caltex and Gulf. Also, domestic manufacturers have turned on the heat, as they become more marketing savvy and plug lower price points. With decanalising of base oil imports most international companies are importing feedstock requirement. However, this has exposed importers to depreciation in the rupee. Last fiscal the rupee slid by 7% YoY and has further dipped by an estimated 3.7% year-to-date. Consequently, raw material procurement costs are eating into operating margins.

A turnaround in domestic economic fortunes is not expected before start of the next fiscal. Transportation is a key consuming industry. After sliding 12.3% YoY in FY01, commercial vehicles (CV) sales slipped by an estimated 12%-15% in 1QFY02. Passenger vehicles have managed a better show with sales improving by an estimated 8% in the quarter ended June'01. In 1QFY02, the Index of Industrial Production (IIP) numbers registered their lowest growth (2.1%) since 1QFY95. The reduced industrial activity has contributed to the weakness in lubricants demand. Under such a scenario, it is likely that most companies will be feeling the pressure in their lubricants business. Pure play lubricant companies are likely to exhibit challenging operating trends for the latest quarter ended.

One possible silver lining for the industry could be the heightened security measures across the globe. With the Indian security forces maintaining equipment in a 'high alert' condition, could it materialize into higher use of lubricants & greases?

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