| Lubricant demand in bric countries |
| 1 | According to a September 2013 International Monetary Fund report, the global economy is experiencing transition on an epic scale. Turbulence in emerging markets has the potential to reduce global growth by 0.5 to 1.0 percent. The report further claimed that all emerging markets - particularly Brazil, India and Indonesia - have suffered due to the threat of slowing asset purchases by the United States Federal Reserve that will effectively tighten their money supplies. By contrast, both the U.S. and European Union have returned to growth, albeit sluggish. Anyone reading the report can be forgiven for thinking they are in a different universe. Have emerging markets, and in particular the BRIC (Brazil, Russia, India and China) countries, gone from being drivers of the global economy to being drags on global growth? If yes, what does this mean for the lubricants industry? In 2012, BRIC countries consumed an estimated 12.8 million tons of finished lubricants. Their global lubricant consumption increased from an estimated 25 percent in 2006 to approximately 33 percent by 2012. Clearly, the economic performance of the BRIC countries is of prime importance to the lubricants industry. Economic Outlook The BRIC countries have very little in common. The only reason they were clubbed together was because they were the only $1+ trillion economies (on the basis of purchasing power parity) outside the Organization for Economic Cooperation and Development countries and because they made a cool acronym. As the world's most populous countries, China and India have populations exceeding one billion people. By contrast, the populations of Brazil and Russia are less than 200 million each. Russia and Brazil are far richer than China and India with GDP's per capita exceeding $10,000, compared to $6,291 for China and $1,508 for India. Russia has nearly zero population growth, while population growth is 0.6 percent in China, 1.2 percent in India and 1.1 percent in Brazil. Additionally, their geographies differ greatly. Consequenlty, growth drivers and restraints for these four countries are often disparate and diverse. According to The Economist Intelligence Unit (www.eiu.com), growth in China will slow sharply in the coming years, growth in India and Russia will increase marginally, and Brazil will be unchanged. The long-term growth outlook for India and Brazil is relatively stable. India, because of its low dependence on exports, was affected only slightly by the recession in the U.S. and European Union. However, more recently, India has suffered from an outflow of foreign capital due to improving conditions in the U.S. and Europe, as well as the prospect of a tighter money supply in the U.S. Both Brazil and India saw their currencies depreciate significantly in 2013. Between 1 January and 15 November, the Indian Rupee lost 16 percent and the Brazilian Real lost 13 percent of their value against the U.S. dollar. Russian growth has been primarily driven by energy exports, with a strong dependence on Europe. Consequently, its growth is affected by growth in Europe. If a shale gas industry takes root in Europe, Russian energy exports will be adversely affected. While consumption has grown during the good times, investments in Russia's manufacturing sector have been few. Indeed, a perceived political risk has caused much capital to move out of the country. Given its near obsolete manufacturing sector, Russia is unable to grow via manufacturing exports. All this, combined with a flat or declining population, makes for a dim economic outlook. The long-term cause of China's slowdown is its demographic profile. China's population is ageing fast, and the share of its working age population is dropping. In the short term, the primary cause of China's slowdown concerns the slowing of exports. Europe and North America simply do not have the same appetite for Chinese goods that they had before the recession. China is also loosing its cost advantage due to rising labor costs and an appreciating currency. The massive stimulus package announced at the height of the recession helped prevent too steep a drop in growth rate, and the Chinese government is continuing to reorient the economy away from exports to growth led by investment and consumption. In reality, the reorientation of China's economy started in 2006. Share of exports as a proportion of GDP dropped from close to 40 percent in 2006 to nearly 25 percent in 2009 and then recovered to around 30 percent by 2011. The reorientation has been quite bumpy. A growing housing bubble prompted the government to clamp down by slowing both credit flow and construction project approvals. This caused a slowdown not only in China but also in economies dependent on the country. |
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