KARACHI: Lubricant makers have yet to reduce prices despite a significant drop in global crude oil prices since mid-2014 and a cut in lube base oil (LBO) rates by a local refinery.

Dealers said lubricants contain 70-90 per cent LBO, depending on the grade, while the rest are additives.

They said the oil marketing companies (OMC) were quick in pushing up the rates on increasing crude oil or LBO price but now they are reluctant to pass on the benefit to the consumers. Many countries have reduced lubricant prices in the wake of falling oil prices.

Stakeholders offered mixed views for not reducing prices. Kenlubes International (Pvt) Ltd CEO Mian Zahid Hussain said there was no direct link between prices of crude oil and lubricating oil.

He also cited a weaker rupee, rising cost of doing business, local taxes and increase in prices of packing material as reasons behind the unchanged prices.

However, lubricating oil prices had been reduced considerably for industrial and processing usage, he said, adding that the National Refinery Limited (NRL) had cut LBO prices by around 23-56pc on different grades since November 2013.

He said OMCs had increased discount rates for distributors and dealers, who should pass on benefit to end-consumers.

OMCs are buying LBO at Rs90 a litre (a drop of 12pc) from the NRL, which produces around 170,000-190,000 tonnes of LBO a year.

The final cost of lubricating oil — including additives, packing material, local taxes, marketing expenses, cost of doing business, cost of utilities, freight, etc — comes to around Rs399 a litre.

Total figures for lubricant production are not available due to a large informal sector. The formal sector’s annual production stands at around 200,000 tonnes, of which 60pc is consumed by the automotive industry.

Mr Hussain said Pakistan was importing nearly 20,000 tonnes of finished automotive lubricant a year. However, there was no significant price difference between imported and locally produced lubricants, he added.

He said although the number of vehicles had increased, demand for lubricants — which is around 325,000 tonnes a year — was almost stagnant due to introduction of latest versions of lubricating oils which have increased the interval of oil change in vehicles.

Shell Pakistan Limited (SPL) Country External Relation Manager Seemi Saad said lubricants industry was evolving and at the same time the industry dynamics were rapidly changing along with technological advancements. This had changed buying patterns and needs of consumers/business partners, she said.

While the government regulates the fuel market, including petrol and diesel, the lubricants market is still unregulated, allowing market players to price their products themselves. These products become subject to free market forces like competition and market share based on the value customers associate with specific products, she said.

While global crude prices had fallen, base oil was only a proportion of the total price composition of any lubricant, she claimed, adding that there were a variety of other factors taken into account when setting a price.

She said base oil was of various types — VHVI, HVI and MVI — each having different price. “Shell Global has chosen to only use VHVI and HVI base oils as MVI can cause health issues like cancer. As a result, we invest in costlier base oils to produce our products.”

Forecast changes in foreign exchange could affect prices, given imports became costlier, she added. “Each differentiated product requires a confidential and patented recipe for additives, whose prices change during the year and are not necessarily linked to changes in base oil. Other cost inputs are packaging costs, transportation and trade costs.”

She agreed that NRL had reduced LBO prices over the last one year and many of these changes were publicly communicated to lube blenders.

“Decision on price reductions or price increases is not only dependent on costs. Good quality lubricants lead to a longer engine life and thus reduce overall cost to the customer over the life of an engine,” she said.

Published in Dawn, February 6th, 2016