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“Difficulties mastered are opportunities won”: the African lubricants market

Shamrock features in the latest edition of Lubezine Magazine, a leading publication in the African lubricants market.

Accounting for approximately 8-9% of the global finished lubricant demand, Africa is a region ripe for growth. Its projected growth in 2016 was 5% and this year, it is 4.7%. Coupled with strong indications of new investments in the region’s manufacturing sector and other key economic sectors such as energy, mining, building, construction and transportation, the growth is expected to increase demand for lubricants. On top of all this, the modernizing of vehicle and equipment parts will also play a role in altering the landscape for finished lubricants in the region.

Overall, it is an exciting time, as the African lubricants market is rapidly evolving with plenty of opportunity to capitalize on. However, the opportunities are not without challenges. Africa is generally regarded as a high-risk environment for trade and investment. Business on the African continent carries a varying risk factor for each country. Issues with, for example, customer credit, trade finance, poor infrastructure, import and trade constraints, counterfeiting, currency volatilities, and sometimes inefficient administrative processes can all cause major delays.

 

Market overview

Many African countries lack lubricant blending facilities and so do not import significant quantities of base oil. For this reason, international base oil suppliers generally see little opportunity in much of the continent.

However, we should not underestimate the potential of those countries that do carry out lubricant blending, using either locally refined base stocks or imported base oils. South Africa, for example, is a major center for lubricant and grease manufacture followed by Algeria, Egypt, Morocco, Nigeria and Tunisia who have substantial blending capacity as well. Other key countries which have blending facilities include the Ivory Coast, Kenya, Ghana, Angola, Cameroon, Tanzania and Zambia.

Furthermore, because of Africa’s huge growth potential, both in general terms and with respect to base oils and finished lubricants, it represents a significant export opportunity.

 

West Africa

West Africa is dominated by a used vehicle population. As such, there is a huge demand for Group I base oils to produce low cost products for the owners of older cars.

Though some smaller West African countries import base oils themselves, when it comes to the big volumes, Nigeria is the main player. In 2015, the lubricant market there was about 450,000 MTPA and by 2022, the total lubricants market is expected to grow to 805,300 MTPA. It is a highly competitive market and is being fuelled by increasing investments in car manufacturing and industrialization.

 

North Africa

Despite the good level of demand seen in West Africa, many European exporters see the northern countries as having possibly the best growth potential. This will be especially true when political stability returns to some of them. With an increase in economic growth, we will see with it, an increase in base oil demand. Further in their favor are the free trade agreement with European countries, meaning that in some cases, they can avoid up to 15% customs duties.

 

East Africa

East Africa has no base oil production to boast of. 70% of finished lubricants are locally blended, which mostly rely on import of base oils. Its two main ports are Mombasa and Dar es Salaam.

New blending facilities in Rwanda and Zambia will certainly create new opportunities. And the region will continue to experience growth in infrastructure development, construction, mining, exploration, manufacturing and the traditional agriculture sector.

The automotive sector still consists of very old fleet with older engine technologies both in commercial and passenger vehicles. Consequently, high quality base oils are not in high demand and the main products shipped are still Group I.

 

South Africa

South Africa boasts the biggest lubricant market in Africa with up to 50 blenders. Predominantly, the market is filled with Group I base oils from local refineries though some importers are also distributing Group II and III from product storage facilities in Durban.

Port storage issues are forcing more and more blenders to look at alternatives such as importing by flexitanks. The more favorable exchange rate – which has dropped from 16.8 in January 2016 to 12.8 in March this year – will boost import in the country.

 

Challenges of distribution in Africa

Despite the rapidly evolving landscape, a huge amount of challenges remain in doing business in Africa. Notwithstanding the political instability and resurging violence in many countries, there is a general lack of transparency, skills shortages, weak infrastructure, and high levels of corruption. All imports are made in foreign currency (mainly USD), but because buyers lack access to foreign currency to pay overseas vendors, they are limited in terms of the products and amounts they can import. One distribution challenge is that existing blenders face the risk of non-conforming raw material and fake finished lubricants being imported and traded in their country.

Yet the continent is not a single entity – far from it – and the markets of its constituent countries show a high degree of variability in their stage of development and appetite for base oils. Furthermore, demand in many of these markets can be unstable, fluctuating in response to both internal and external factors.

What is common across the board is that all blenders in Africa must obtain a license to import base oils or any other petrochemicals. The process is a complex one, to say the least, and takes from two days to three weeks in more developed countries and up to one year in other more administratively-complex countries.

Logistical constraints also remain. Rail and port infrastructure is built for resource extraction rather than to facilitate trade; and it desperately needs upgrading. Landlocked countries require efficient transport links with ports. The countries that do have ports find that they mostly operate at full capacity and experience costly delays due to poor handling, administrative processes and slow clearance.

In addition to the logistical constraints, there are financial ones too. In some countries, there is a ban on making prepayments, as payments can only be done along with import declaration and related shipping documents. Most imports are completed through Letters of Credit and blenders rely on local banks with whom they negotiate credit lines for importation.

Related to this, African banks face numerous restrictions in meeting the demand for trade finance, in particular with limited US dollar availability (by far the dominant currency in international trade, and by extension, trade finance), regulation compliance, and the inability to assess the credit-worthiness of potential borrowers. Currently Africa faces a funding gap of about $120 billion in trade finance.

Since lubricants blenders mainly rely on the import of base oils and finished lubricants, this is a huge problem.

 

So, what is to be done?

Though many challenges remain, the potential in Africa is unquestionable. Whilst serious investment needs to be made to upgrade ports and infrastructure – and this will certainly alleviate some of the constraints – there are a number of quick wins. For example, deliveries by flexitank. Using flexitanks means much smaller volumes can be shipped resulting in less upfront capital getting tied up and overall resulting in a more cost-effective and efficient supply chain and distribution.

Our company has been supplying African blenders for more than 10 years. Dealing with local customers on a daily basis, at Shamrock we understand not only the potential and power of the market, but also the vulnerability of local business. Economic growth in Africa is on the increase. Local businesses need to establish easy and smooth trading connections within the continent as well as with the rest of the world. Accordingly, modern logistics solutions strive to turn these challenges into real competitive advantages. Flexitank is a unique, modern, and cost effective solution to deliver liquid goods easier and faster even to landlocked countries and difficult-to-reach destinations. Financing solutions are also offered to customers importing by flexitank resulting in real cash benefits and better cash flow and currency fluctuations monitoring.

Overall, each country has its own specificities and represents different barriers for exporters. At Shamrock, we provide local expertise with global knowledge and can assist African blenders in their sourcing requirements in compliance with local authorities and logistical constraints.

 

About Shamrock

Shamrock Shipping & Trading Ltd has been involved in the trading, shipping and distribution of Petroleum Products over the past 15 years.

With a highly experienced and skilled team, our company has developed over the years as a reputable and recognized name in the base oils and lubricants industry. Known for a high level of service and knowledge, we aim to maintain, above all, a trustful cooperation with all our partners.

Today, Shamrock is the global leader in flexitank deliveries and the ‘one stop shop’ in the lubricants industry, offering a full range of products and integrated services to meet all the base oil and specialty blending needs of our clients. Our clients benefit from consistent supply options from the most reliable refineries worldwide and the most favorable logistics and financing terms.

Our goal is to continue achieving the high standards set by our Company, and maintain Shamrock’s ever presence as a leading partner in the base oils and lubricants industry.