The lubricants market faces a “very gradual” recovery, regardless of the ultimate size of the dip in the economy or the economic modeling scenario, consultants from IHS Markit said during a virtual town hall meeting organized by the Independent Lubricant Manufacturers Association last week.
In the early days of the pandemic, the United States-based consulting firm projected a slide in U.S. lubricant demand of 10 to 15 percent, according to Suzan Jagger, vice president of oil markets and downstream consulting. IHS has since revised its forecast to an average 25 to 30 percent drop below 2019’s demand level.
“Economies came to a grinding halt starting in mid to late March. We went from an economy that was humming along pretty well in the U.S. to over 30 million people filing for unemployment within a matter of a few weeks,” noted Bob Flanagan, who is consulting director for economics and country risk. “This was exacerbated in some industries by the fact that oil prices collapsed, as well.”
Assuming that the pandemic subsides in the third quarter, IHS expects that U.S. economic activity has already hit its lowest point, with consumer spending and real gross domestic product dropping at annualized rates of 43 percent and 37 percent, respectively, during the second quarter. “Hopefully, we’re starting to claw back now as we reopen slowly,” Flanagan said.
Light vehicle sales dropped from 16.9 million units in 2019 to a projected 12.4 million units this year. IHS does not expect sales to fully recover until 2024 or 2025.
Industrial production, on the other hand, should see a spike in 2021 as it builds back up, returning to a more normal rate around 2023, Flanagan said.
Based on sales activity among end users, the overall lubes market is unlikely to make a full recovery until 2022 or 2023, he projected. Metalworking fluids could be down “for an extended period.”
However, activity may not climb all the way back to the comfortable levels of 2018, reaching just 90 percent of that mark by 2025. “We will have lost three to four years of sales activity and starting to build back up from that,” Flanagan explained.
The total North American lubricants market hit nearly 9 million tons in 2018. Industrial and process oils accounted for 35 percent of that volume, followed by passenger car motor oil at 29 percent, heavy-duty engine oil at 16 percent and other transport sector oils at 20 percent.
According to Jagger, the most immediate challenge is in the lubricant supply chain. Lube manufacturers have seen an “incredible disruption” in their ability to distribute products, manage inventories and the plant environment, and control stocking levels and production, all relative to significant variations in demand. “All of this disruption is going to require a lot of flexibility in the next couple of years in order to manage,” she cautioned.
Lube makers will face difficult decisions around plant closings, outsourcing and other areas. Jagger also expects the pandemic to further accelerate the consolidation seen across the North American lubricants industry in recent years.
However, independent lubricant manufacturers may have an advantage in the current climate. She pointed out that the ones that weathered the last economic recession were also able to take advantage of its effects on the industry. In fact, independents may be poised to capture more market share from the oil majors. “There is room for them to make some gains,” she observed. According to Jagger, the best business model during this economic shakeup includes a product mix with multiple sources and broad product lines that can be adjusted to move into new markets quickly. Larger competitors with larger plants and volumes and more rigid supply chains will have much more difficulty adjusting, she remarked.