Lubes growth opportunities remain
despite switch to electric vehicles
Lubricating oils have traditionally been one of the most attractive areas in the oil and gas value
chain, but disruption is on the horizon with the rise of electrification in the transport sector.
Alvaro Bau, Giovanni Bruni, Luqman Hussin, Dieter Kiewell, Bijan Kohler, and Richard Verity
DECEMBER 2018 • OIL & GAS PRACTICE © Seasontime/Shutterstock
With consistently high margins overall, lubricating product type, so where to play matters. This growth
oils have traditionally been one of the most is also subject to some significant risks, so investors
attractive areas in the oil and gas value chain. will need to keep a close eye on developments in
However, looking ahead, we could see disruption as areas such as technology and policy.
electrification takes hold in the transport sector. To
assess what may be on the horizon, we conducted The study confirmed our expectation that lubes
an in-depth market study and developed granular volume growth would continue but at a slightly
projections out to 2035. The main finding was that, slower rate over coming years, with road-transport
while volume growth may be flattening, there is still demand (currently 40 percent of the total) likely to
room for value-pool expansion. This will, however, peak within the next five years (Exhibit 1). From
be highly variable by region, market segment, and then on, transport demand will decline slowly as
Exhibit 1 Lubricants volume growth will slow slightly, and road-transport demand
could peak in the next five years.
Projected annual lubricant Compound annual
demand by sector,1 million tons growth rate, %
47.9 48.9
46.3
44.2 16.9 15.9
42.7 17.3
17.4
17.2
0.1 2025–35
Road transport/
automotive 2017–25 –0.8
28.9
27.2
25.6 1.5
23.8 1.2
22.7
Nontransport/ 2017–25 2025–35
industrial
2.5
1.6
Other transport 4.0
2.8 3.0 3.4 3.7
(marine, aviation,
rail) 2017 2020 2025 2030 2035 2017–25 2025–35
1
Figures may not sum, because of rounding.
Source: Energy Insights by McKinsey; McKinsey analysis
Top-branded products will achieve the highest premiums,
although whether this can be sustained remains to be seen.
2 Lubes growth opportunities remain despite switch to electric vehicles
the share of electric vehicles (EVs), car sharing, Looking at margins, the road-transport sector will
and hailing increases and as we see longer change perform favorably as higher-margin synthetic lubes
intervals for remaining internal-combustion-engine expand sharply to take a 70 percent market share by
(ICE) vehicles. 2035. Top-branded products will achieve the highest
premiums, although whether this can be sustained
Demand from other transportation sectors—such remains to be seen.
as marine, aviation, and rail—is less significant and
will continue to grow. Nontransport and industrial Margins will also rise significantly in smaller
consumption, which makes up the majority of lubes industrial sectors, such as fast-moving consumer
demand, should also keep growing steadily, tracking goods (FMCG) and chemicals, but will stagnate in
global GDP per capita growth and more than making the key industrial sectors of transport equipment
up for the decline in transport demand. and metal works—which together account for more
than 30 percent of the global value pool (Exhibit 2).
Exhibit 2
Margins for lubes will vary by sector.
Regional gross margin pool heat map,1 2017–35,
Compound annual growth rate, % Growing Declining Flat
Synthetic Mineral
Engine Process Hydraulic Gear Margin Engine Process Hydraulic Gear Margin
oils oils fluid MWF3 oils Greases pool % oils oils fluid MWF oils Greases pool %
Road 38 6
Marine 2 4
Aviation 1 <1
Transport
13 5
equipment
Metal
23 13 4
works
FMCG2 and 4 6 2
chemicals
Total 74 21
1
Flagging out distinctive (GDP-plus) regions/products, and underperformers (lower than average lubricant growth rate).
2
Fast-moving consumer goods.
3
Metalworking fluids.
Source: Energy Insights by McKinsey; McKinsey analysis; Jagger Advisory; Expert interviews
Lubes growth opportunities remain despite switch to electric vehicles 3
Exhibit 3
The lubricants value pool could grow almost 45 percent by 2035.
BASE CASE: Lubricants marketing gross margin pool, 2017–35, $ billion per year
8.2 49.0
–2.3
7.4
–3.5 +44%
5.1
34.1
Road Industrial Future mobility Environmental Product
transport output changes regulation high-grading
Demand increase Value-pool Demand Demand Value-pool
due to personal increase decrease due to decrease due to increase due to
mobility, freight due to higher fleet-ownership longer change rising share of
cargo industrial activity model for ride- intervals for high-performance
transportation and high-grading sharing, autono- internal- lubricants
mous vehicles combustion-
engine vehicles
2017 2035
Source: Energy Insights by McKinsey; McKinsey analysis; Jagger Advisory; Expert interviews
Industrial demand and higher transport margins transport—and higher margins. In Europe and
to drive value-pool growth the Americas, on the other hand, slower value-pool
In our base case, the global lubricants value pool growth as road-transport volume declines means
is expected to grow 44 percent by 2035, driven investors need to adopt a more defensive strategy
primarily by increased penetration of higher- (Exhibit 4). Emerging markets are expected to
margin branded or advanced products, typically grow at 3 percent per year, or three times the rate
synthetics, along with growth in demand from of developed countries, adding $8 billion in market
industry (Exhibit 3). Road transport, transport value by 2035. China remains the biggest single
equipment, and FMCG are the sectors most likely to growth market, but rising margins in China by
offer the fastest-growing value pools. switching to advanced formulations and synthetics
are expected to lag about five years behind OECD
Geographically, Asian countries that aren’t a part countries, with other non-OECD countries five years
of the Organisation for Economic Co-operation and behind China.
Development (OECD), including China, represent
the largest, fastest-growing value pool, driven Developed countries will contribute just 20 percent,
by volume growth in all sectors—including road or $3 billion, of the market growth up to 2035,
4 Lubes growth opportunities remain despite switch to electric vehicles
Exhibit 4 Growth in the lubrication value pool will vary by region.
Gross margin pool growth, base case, 2017–35, by volume demand circles, million tons
4 1.8 Africa
Non-
Latin America OECD
3.0 Asia
19.8
3
2.9 Middle East
Compound
annual 1.5 Eurasia 2.8
2
growth
rate, % OECD1
Asia–
Pacific
1 OECD
Europe OECD Grow
7.5 Americas Sustain
9.6
Defend
Other
0
0 5 10 15 20
Gross margin pool
by 2035, $ million
1
Organisation for Economic Co-operation and Development.
Source: Energy Insights by McKinsey; McKinsey analysis; Jagger Advisory; Expert interviews
mainly through higher margins from branding, as hour to below $100—the point at which EVs and ICE
most products are already advanced formulations. vehicles reach cost parity—by 2020 instead of our
base-case assumption of 2025. This would accelerate
Disruptive factors to watch out for adoption of EVs, leading EVs to take 25 percent of the
Despite this generally positive outlook, three market by 2035, compared with around 15 percent in
potential disruptions—battery technology, green our base case.
regulation, and industry consolidation—could lead
to lower volume growth and commoditization, which Next on the risk list is an acceleration of green
pose significant threats to profitability. Altogether, regulation, which could hit industrial demand in
these factors could erode up to $17 billion (35 percent) particular. Tougher environmental policies would
from the anticipated global value pool ($49 billion) in likely lead to industrial process improvements,
2035 (Exhibit 5). greater recycling, and a rise in circular economies.
The most likely disruption is from a breakthrough There is also a margin threat from faster switching
in battery technology that reduces cost per kilowatt- away from personal vehicle ownership to
Lubes growth opportunities remain despite switch to electric vehicles 5
Exhibit 5
Disruptions could erode more than a third of the projected 2035 value pool.
DISRUPTION CASE: Lubricants marketing gross margin pool, 2017–35, $ billion per year
–1.4
14.9 –2.2
–2.2
BASE –4.2 –34%
CASE
2035 –6.7
34.1
Battery Green Fleet No business to Full 32.3
parity regulation ownership consumer channel commoditization
Battery prices Green policies 50% of cars are Elimination of Full
decline rapidly, improve industrial fleet-owned due B2C channel for commoditization
supporting faster lubricant usage; to rideshare/ automotive narrows across all sectors
electric-vehicle unit-lube demand hailing B2B sales the unit gross further reduces
adoption; pene- falls by 1.2% lower branded margins between synthetic unit
tration reaches a year motor-oils synthetic and gross margins
25% by 2035 vs margins mineral lubes in by 2035
14% in base case 2025–30
2017 2035
Source: Energy Insights by McKinsey; McKinsey analysis; Jagger Advisory; Expert interviews
ridesharing and other fleet-car use, because lube The biggest risk to margins is from full product
sales to fleet buyers (B2B) tend to have a lower commoditization, linked to the switch to fleet
branded markup. The move to fleets could be driven ownership, falling B2C sales, and OEM preference
by tighter regulatory restrictions in urban areas, and for “genuine oils.”
if half of cars switch by 2035, the greater bargaining
power enjoyed by fleet owners could reduce Under full commoditization, synthetic margins
advanced product margins by up to 15 percent. are unlikely to be more than three times those of
mineral-based products. Group IV/V base stocks
This leads to the risk of a collapse in the B2C producers would benefit from the tighter balance
channel in automotive lubes, with fleet owners and created under this scenario, but commoditization of
other supergroups, such as maintenance centers, this sort could wipe $4 billion off lubes’ gross margin
becoming the main customers. This strengthened pool—compared to about $2 billion each for the other
bargaining power on the part of buyers would lead potential disruptive factors.
to partial commoditization and a further decline
in brand premiums, with the difference between In the forthcoming article, “Positioning for growth
synthetic and mineral product margins falling by up in the fast-changing lubes market,” we will look
to 30 percent. at how companies should best position themselves
6 Lubes growth opportunities remain despite switch to electric vehicles
for value-pool growth and guard against these
potential threats.
Alvaro Bau is an associate partner based in
McKinsey’s Madrid office; Giovanni Bruni is an
associate partner in the Singapore office, where
Luqman Hussin is a specialist; Dieter Kiewell
is a senior partner in the London office, where
Bijan Kohler is a consultant and Richard Verity
is a partner.
Designed by Global Editorial Services.
Copyright © 2018 McKinsey & Company.
All rights reserved.
Lubes growth opportunities remain despite switch to electric vehicles 7
