As if we have not had enough Black Swan events in 2011 already, the Japanese earthquake and tsunami are just another example of the power of low probability, high impact events! What else can go wrong?
After the wobble in the Japanese stock and foreign exchange markets, the consensus view seems to be that the world’s second largest economy will overcome the recent challenges and move forward, hopefully providing enough stimulus to re-start Japanese economic growth. Our latest White Paper from RPS Energy provides an insight into the impact of the Japan disaster on the lubes industry, while a second White Paper, also from RPS, focuses on recent political unrest in the Middle East and its effects on the energy sector.
Will the aftermath affect the scope of the nuclear energy debate? Just as the financial crisis changed regulation of the world economy, a reduction in commitment to nuclear power, which was becoming the new orthodoxy, is likely to drive up the oil and gas prices more rapidly than before with the effect of slowing growth globally.
Around the world we are already seeing a more sedate rate of growth compared with the 2010 bounce. Europe is struggling with its banking hangover, while stimuli such as scrappage schemes and other purchasing incentives to encourage car replacement have tailed off. The shut-down of a number of the leading automotive producers, not just in Japan, has also served to highlight the fragility of the world economy based on Just-In-Time supply chains.
As a result, we can expect to see a more modest recovery in Lubricant demand. Wherever possible, local BRIC manufacturing plants will be favoured ahead of imported vehicles, thereby further supporting the local lubricant industries in China, Brazil, India and Russia.
In China, while GDP grew at 9.8% in Q4 2010, the surprise current account deficit in January combined with the rising inflation rate served to indicate that growth in commodity prices is having an impact as the economy begins to turn towards domestic, rather than export-led, consumption.
In the US the PMI (Purchasing Manager’s Index) has continued its rapid growth in March as the PMI registered 61.2 percent. While slowing slightly this is the 20th positive month and augers well for the ongoing lubes demand there.
Overall the lubricants market should continue to progress in 2011, in addition, specification changes will continue to work through the market, pushing more companies and consumers towards the synthetic and semi-synthetic lubricants, even in previously laggard markets.
As BP’s recent announcement of re-starting work in the Gulf shows, a year is a long time – and a still a short time – in the Oil business. Given Warren Buffet and Berkshire Hathaway’s purchase of Lubrizol, the lubricants business remains a good long term place to be invested.
Finally, you will notice a change in this month's Bulletin and the OATS Lubes Resource Centre on our website. We have now created a section called Environmental and Regulatory Watch which will keep you up to date with the latest environmental and regulatory issues from around the world that may impact the lubricants industry. Upstream news has now be incorporated into the other sections of the Resource Centre as appropriate. We hope you like the change and, as ever, if you would like to offer a comment or contributions to the OATS Bulletin, please contact us at bulletin@oats.co.uk.
Sebastian Crawshaw, Chairman OATS