A Lesson in Forecasting

To support such decisions, company executives will turn to a variety of published and proprietary sources. Moreover, theyll peruse scores of articles (like those published in this magazine) based on industry papers, presentations and interviews.

The traditional practice to assist decision-making is to validate published papers internally within companies. This means company analysts determine how the published information aligns with known knowledge from other sources (i.e., whether or not assumptions are reasonable) and if the conclusions make sense. If so, companies will incorporate published findings into their thinking and use them along with other sources to make better and more informed decisions.

If they do not consider learnings from a published paper to be insightful, they will simply not use them, and no one outside the company will ever know whether they thought the projections were more right than wrong.

The resulting business decisions may be in the million or even billion dollar range. Those of us who write industry projections have to be conscious of this and author the best possible papers we can. However, one rarely sees follow-up evaluations of past papers, so this article will tackle a forecast in hindsight. it will review a decade-old forecast, ask whether its predictions were more right than wrong, and also hear from the author about what changed since then.

Gauging Demand

In 1995, James T. Maguire was manager of quality and technology for Sunoco Lubricants. In this role, he looked at worldwide lube oil supply and demand. That year Maguire wrote A Million Dollar Look at the Future of the Automotive Lubricants Industry: Trends, Observations, and Opportunities, and the following October he presented it to the Independent Lubricant Manufacturers Association.

The dozen years since this paper was presented provide an object lesson in looking back. We can see where the analysis was right or wrong, how it added to the industrys knowledge base – and how the tides of change may overtake even the most thoughtful analysis.

In his overview, Maguire projected that worldwide lube oil demand would grow only moderately over the decade from 1995 to 2005. Although the market had not yet digested a recent expansion at Petro-Canada and the Excel Paralubes project, he believed the need for new base oil capacity would again surface in the post-2000 era. Sure enough, since 2000 the base oil market has seen significant capacity additions almost yearly.

More pointedly, Maguire said in his paper that the use of unconventional base oils – API Groups II and III – would continue to grow following adoption of the then-new ILSAC GF-2 engine oil standard and its successor, GF-3. The automotive market now has ratcheted up to GF-4 passenger car engine oils and is heavily dependent on hydrocracked base stocks.

In the international arena, Maguire highlighted Latin America as the region of the world holding the most potential for profits for lube marketers. However, since 2000 China and Eastern Europe have overwhelmingly demonstrated the worlds greatest volume growth.

If I knew then what I know now, Id have been a lot closer to the right numbers, but I dont feel bad about that, Maguire told LubesnGreases recently. When I started working in lubricants in 1970, my company employed a full-time Ph.D. economist to predict macro-trends, and its Lubes division had a four-man planning staff to forecast lube numbers. Over 30 years it downsized planning, and I carried this role as an add-on to my real job. It made sense at the time to bet on South America because of its free economy, he added, but few anticipated the rapid liberalization of China trade.

In his 1995 paper, Maguire also touched briefly on industrial lubrication trends, such as the increasing emphasis on productivity gains and equipment reliability, rising environmental pressures, and the drive to reduce costs. He also took note of the heavy service demands on metalworking fluid suppliers, and the growing concerns about environmental and healthy and safety issues. He pointed to mining as an attractive market opportunity for specialty products and services; to the oil and gas industry as a target for new products (e.g., specialty drilling fluids); and to metalworking and in-plant lubricants as opportunities for lubricant suppliers to package products and services. All these forecasts were spot on.

Engine Oil Shifts

The main thrust of Maguires analysis targeted what would happen in the U.S. automotive lubricants market. For example, he observed that the shift from Do-It-Yourself to Do-It-For-Me was happening at an average rate of 3 percent from 1990 to 1994. Today, the DIFM segment is over 70 percent of the aftermarket for engine oils – beyond what even Maguire expected. He did note that aging baby-boomers were less inclined to change oil themselves. He also stated that used oil disposal was burdensome for DIYers, and it was easier to be environmentally conscious by having a professional oil change. Lastly, he saw the price of an oil change at quick lubes declining due to increased competition.

Overall, this projection was on target. But as Maguire today says, I think the biggest factor I missed in this analysis was the successful return of Auto Dealers to the installed service market. So Id obviously bump that projection up.

Regarding passenger car motor oils, Maguires paper identified three key drivers:

1) The quest for convenience as baby boomers get older.

2) The push for environmentally acceptable oil disposal.

3) The emphasis on helping automakers meet CAFE standards.

The strategic implications of these, he added, were that oil companies needed to establish a market position in quick lubes before it was too late. The service station-based oil change model was fading fast. Some DIY used oil recovery programs were being made available, and there were new product opportunities as specifications became tighter.

In actuality, the shift away from DIY accelerated as a result of these external forces and others. Over the past 12 years, prices for professional oil changes separated into two groups: Premium (i.e., those at higher-end quick lubes and car dealers), and Affordable (i.e. those at auto parts stores like Pep Boys, mass merchandisers like Wal-Mart, repair garages, and tire stores. Affordable DIFM oil changes helped to accelerate the shift from DIY to DIFM, too.

Maguire had suggested that used oil recovery programs would expand, encouraging DIYers take their used oil back to stores and installers for recycling. While many auto parts stores and mass merchandisers are still the place to take DIY used oil, many installers are more reluctant now to mix it into their own stream of used oil; this is limiting the expansion of DIY used oil recovery programs.

Thats a shame, Maguire feels. As someone who spent 35 years working to recover lube molecules, I still think it a crime to burn them or throw them away. I watched several promising rerefining processes come and go over the past 10 years, and still feel that theres an opportunity for the right technology. I congratulate the rerefiners who have demonstrated a lasting commitment to this business for their fortitude.

Diesel Trends

Looking at the future of the heavy-duty automotive lubes market, Maguire identified the following trends in his 1995 paper:

1. Deregulation of the trucking industry, leading to more cost-sensitive fleet operators.

2. Energy efficiency.

3. Emission standards for diesel engines.

4. Environmentally friendly oil disposal.

For lubricants, he suggested, these driving forces would lead to declining use of engine oils and transmission fluids; new product opportunities as specifications became tighter; and value-added service opportunities.

In actuality, new diesel emission regulations rose to be the Number 1 force for change in the trucking industry and for heavy-duty lubricants. In October 2006, ultra low sulfur diesel fuel (ULSD) became mandatory for on-highway diesel trucks, with sulfur content only 1/20th that of traditional diesel fuel. ULSD also has a lower energy density and costs more – up to 13 cents more per gallon in some cases.

At the same time, U.S. EPA regulations now demand the use of diesel particulate filters (DPF) to remove particulates from truck exhaust. Pressure was put on engine oils to reduce their contribution of sulfated ash, phosphorus and sulfur to the exhaust stream, too, to protect these filters.

For oil marketers, great product opportunities resulted from ULSD and DPFs. Vehicle operators began purchasing more fuel additives to compensate for diesel fuel changes. Oil and additive companies began reformulating diesel engine oils to limit their ash content. On the positive side, greater compatibility with DPFs was seen. On the negative side, oil was costing more and drain intervals became shorter. Moreover, fleet managers began to rethink how they maintain their vehicles. Reducing diesel fuel sulfur changed everything!

Over the past 12 years, I think weve seen this forecast come to pass. The bar was set high by environmental regulations, and Im proud to see that the lubricants industry has been part of the solution for diesel emissions, Maguire told LubesnGreases.

In looking back at what James Maguire projected 12 years ago, it seems that he indeed was more right than wrong. And where he wasnt, we have the blessing of perfect hindsight in understanding why.