The ongoing trade war between the United States and China has left the lubricant industry in the crossfire, and some market players are shifting their practices in an effort to mitigate financial burdens caused by the increased tariffs.
So far, the U.S. and China have imposed three rounds of tariffs – in July, August and September – on hundreds of types of goods imported and exported between the countries. Among the categories of products listed are lubricants and lubricant additives.
Customers exporting to China have been reluctant to develop new business with U.S. manufacturers since the announcement of the possible tariffs, Lubricating Specialties Co. President and CEO Sydney Thwaites said. He added that many of his customers have said they cannot absorb the increased costs, and have inquired about alternative supply points to avoid the tariffs.
Gang Xie, director of technology at Chinese company Nator Lubrication Co. Ltd., believes that suppliers from other regions not subject to the tariffs, like Japan or Europe, will increase their selling prices to match the final prices of tariffed goods, likely with the goal of increasing profits. The tariffs are [a] benefit for others, he asserted.
Alternatively, suppliers not subject to tariffs could maintain their prices, gaining a price advantage against those that pay the tariffs and using it to grab market share. As Thwaites put it, the tariffs on U.S. companies selling into China will give local producers and imported products from Asia, Europe and other parts of the world an opportunity to take market share away from U.S.-produced lubes.
Xie has already seen tariff-driven price increases. The price of lubricant additives, and some special base oils as well, were increased because of [the] tariffs, Xie told Lube Report. He said that his company has switched from international suppliers to domestic suppliers for some of their raw materials in an effort to combat new costs. If we could not change the supplier, we had to accept the price increasing because of tariffs, he added.
Some companies, like Lubricating Specialties, have chosen to switch manufacturing facility locations. Thanks to the Pico Rivera, California-based companys flexible manufacturing capabilities, it is able to move a significant portion of its Chinese customers requirements to its location in Kingston, Jamaica, Thwaites said in an interview.
This has not mitigated all tariff-induced costs. It is likely that there will be some additional costs and longer transit times to export from the Jamaica manufacturing facility. Those kinds of logistics-related costs can limit a companys ability to take advantage of alternative supply points, according to Suzan Jagger, president of consultancy Jagger Advisory LLC.
Jagger contends that the tariffs most affecting the U.S. industry have been U.S. tariffs on steel, not those on lubricants and lube additives. Steel tariffs – which the U.S. imposed on imports from Europe, as well as China, have significantly impacted the cost of drums used to transport some lubes. It has been estimated that this would add about $0.05 per gallon to lubricants packaged in drums. We are beginning to hear that some European customers that purchase from the U.S. are now considering alternative sources.
Clearly any companies subjected to the tariff jurisdictions will be impacted on a margin basis, and potentially on their market share. If tariffs remain in force for an extended time, we will see this impact where marketers will choose to invest in manufacturing and distribution assets, she added.
The U.S. and China have reportedly resumed trade talks, according to a Reuters article posted earlier this week. U.S. President Donald Trump and Chinese President Xi Jinping will meet at the Group of 20 industrialized nations meeting in Argentina in late November. Should these talks fail, the U.S. is prepared to implement a new round of tariffs on $257 billion of goods in December, the Trump administration announced.