LUBRICANT INDUSTRY NEEDS ATTENTION, REGULATION

SHAMSUL GHANI
(feedback@pgeconomist.com)
July 19 - 25, 20
10

Lubricants keep the wheels moving - wheels of a number of industries, and also of the economy. Their uses can be broadly divided into two categories: industrial and automotive. The industrial use is extended to almost every sector of real economy: agriculture, textile, engineering, energy, construction, etc. The various forms of lubricants include engine oils, hydraulic oils, gear oils, heat transfer oils, compressor oils, spindle oils, refrigeration oils, and many more. The major market players in the lubricant industry are Shell Lubricants, Caltex, Pakistan State Oil, Kenlubes, Total Atlas Lubricants, Haroon Oils, Mehran Oils, Pakistan Lubricants, and MAL Pakistan.

The leading brands are: Havoline (Caltex), Helix (Shell), CNG plus (PSO), Master (Pakistan Lubricants), Double Horse (Mehran Oils), Mobil 1 synthetic motor oil (MAL Pakistan), and Haroon 550 (Haroon Oils).

Shell Lubricants in the private sector claims to be the number one global lubricant suppliers with the history of having a market share of 13 percent in 2008. Pakistan State Oil in the public sector, having 3,600 retail outlets to serve 2.8 million customers across the country, claims to have the largest distribution network among OMCs.

With the untapped potential of industrial sector and with the ever-increasing transport needs of a populous country like Pakistan, the role of lubricant industry is much greater than the attention it receives. The fast growing industry is hit by a number of problems requiring measures that fall within the ambit of fiscal and administrative policies. Lack of basic raw material, unregulated commercial networks, smuggling, unauthorised blending and illegal profit-making are the major issues that are threatening the industry.

The basic raw material for lubricants LBO, lube base oil, is produced by National Refinery which caters to less than 50 percent requirement of the industry. Around 10 percent of the requirement is legally imported while the balance is smuggled. One may question government's wisdom in restricting the LBO production to a single refinery. But, in the ultimate analysis, the use of imported or locally produced LBO will not appear to matter much as UAE which relies solely on imported LBO is carrying out the business profitably by exporting lubricants to more than 50 countries of the world. The Chairman All Pakistan Lubricants Manufacturers Association keeps demanding abolition of custom and federal excise duties to make the industry viable. The country already under huge fiscal pressures obviously cannot concede to such demands. Nevertheless, the issue needs to be seriously discussed, and sorted out. A review of duty/tax structures should not be ruled out by the government representatives. The growth of the industry is much more important than a few billions of revenue. Those representing the industry should also realise that loopholes allowing for the revenue slippage should be plugged for mutual benefit of the two sides.

The failure of public transport system has resulted in overcrowding of personal transport vehicles. Benefiting from the low-interest and free-credit economy of past years, people had acquired personal transport means to minimise their transport hassles. This was a positive social transition that gave boost not only to auto sector but also to the allied industries - lubricants industry being one of them.

The huge increase in demand for auto lubricant oils provided spurious operators with an opportunity to make illegal profits through back-street sale of substandard, illegally blended, and low-cost smuggled lubricant oils. The illegal blending ranged from mixing of low quality products to the use of used-oil. Back-street sale is perhaps not the right description as the business is being conducted in open on the main streets, with nobody to stop nobody. The prices of genuinely produced lubricant oils have gone up so swiftly that low-income and middle-income groups have resorted to the cheap, on-footpath purchase of substandard lubricants. They don't even realise that for the sake of short term savings they are jeopardising the mechanical health of their vehicles and that could cost them much more than what they have saved. The commercial networks operating in the unregulated sector with an open license to manufacture and sell substandard and damaging lubricants need to be nabbed and dealt with appropriately.

Smuggling has been a big economic deflator of Pakistan's economy. Food and grain smuggling to one of its neighbor-cum-brother country and then oil smuggling from yet another neighbor-cum-brother country are the major events of the country's smuggling history - one leading to national food insecurity and food inflation and the other harming one of growing and most important industries.

The depreciated rupee has added to the cost of legally imported as well as smuggled lubricants. The prices of genuinely produced and genuinely imported lubricants have gone up in tandem. The ultimate cost bearer is the consumer. Surprisingly, there is not much hue and cry about the sustained increase in the prices of auto lubricants in comparison to what we see when petrol and diesel prices are increased. The reason seems to be the low recurrence of lubricating cost. The menace of smuggling needs to be tackled anyway. This will give strength to the country's lubricant industry.

Another problem of the industry is the misuse of used lubricants oils (ULO) that are needed for reclamation of plants. Commercial importers for illegal blending and profiteering use these oils. The substandard lubricants thus produced and sold prove highly damaging to the vehicles. This problem, like that of smuggling, needs to be handled administratively. As suggested by the chairman APLMA, use of ULO should be allowed only to the registered blenders and reclamation plant operators. Moreover, the import of carbon oil and ULO that are used in the production of substandard lubricants should be allowed for industrial purpose only, barring the commercial importers from making their use for illegal profit making. The following words of the chairman APLMA need government attention:

"By adopting these fiscal and administrative measures the national industry could flourish and also be able to fill the demand and supply gap by providing quality lubricants. The industry could be able to export the finished lubricants in the world markets just like UAE..."