Lubrizol Outlines Growth Plans

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Capital expenditures at Lubrizol Additives will likely top $300 million this year and $250 million in 2013, the company’s president told a recent industry meeting. Much of the money will go to construct an additives plant on a greenfield site in China, for research laboratories in Asia, and for upgrades to existing manufacturing facilities in Texas and France.

After 2013, the additive company expects to continue investing at the rate of around $200 million a year to improve its infrastructure, ensure supply security, create and commercialize new technologies, and add more capacity — largely in Asia.

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The lubricants industry requires this level of commitment because it is becoming more technically challenging and complex, Lubrizol Additives President Dan Sheets told the ICIS World Base Oil & Lubricants Conference in London. With North America and Europe seeing little volume growth, the company also needs to bring more manufacturing muscle to the high-growth markets of Asia, he indicated.

This level of investment would not have been possible in 2006, when the entire additives industry was ailing, Sheets noted to a packed auditorium on Feb. 24. But things have turned around since then, and so have Lubrizol’s margins. “Financial health is improving,” he said with evident relief, “and while global growth remains at a modest 1 to 2 percent level, the future looks cautiously optimistic.”

Lubrizol was bought last year by Berkshire Hathaway Inc. and folded into its portfolio of industrial holdings, so it no longer discloses its financial data. But in terms of global volume sales, Lubrizol has seen about 1 or 2 percent compound annual growth since 2002, Sheets said. He estimated that the cost of replacing Lubrizol’s current infrastructure would be $4.6 billion; it requires $180 million a year in capital investment just to keep it running.

Meanwhile, complexity is becoming the industry’s biggest challenge and is compounding its need for capital. This underscores how critical it is to have strong margins and returns on its investments, he said.

“Lubricant technology, for example, now sees continuous upgrades, with new engine oil specifications coming along about every two years,” he said. “That adds complexity, because older specifications don’t go away just because new ones are introduced.”

Geographically, markets are shifting too, “with new customers and new OEMs,” Sheets told the ICIS gathering. “Security of supply has become front-of-mind for many customers, who now demand business continuity planning from suppliers like Lubrizol.”

R&D remains the heart of the business, and also demands constant attention. Regulatory requirements to improve energy efficiency and reduce emissions are one example; another is the growing number of base oil suppliers. Each new base oil supplier requires support for product approvals, he noted, and their customers sometimes seek individualized formulations, which require more testing.

Maintaining a strong R&D pipeline is another driver for investment, Sheets said. The additives industry spends nearly $250 million per year to perform industry-registered drivetrain and engine tests, and that price tag doesn’t include all the development work that precedes any engine testing. He estimated the total R&D spend for the additive industry in 2011 topped $600 million, versus about $430 million in 2006.

Despite large capital and R&D investments, Sheets said, only modest overall growth is expected, “so to continue, we need to keep having the kind of return on investment that we’ve built up to now.

There’s also a need to put additive production assets where growth is occurring, which is why Lubrizol is building a new plant in the southern China city of Zhuhai, near Macau. It is slated to begin operating in 2013. Moneys also are going to a new research laboratory in Zhuhai, and to an existing lab in India.

“The Zhuhai plant will have a very careful, phased-in startup,” Sheets told the ICIS meeting. The company will begin by base-loading some of its blending capacity with additives currently made at other Lubrizol plants. “Transferring some business from other plants will let us quickly move closer to customers in China and the Asia region,” he said.

In a separate interview with Lubes’n’Greases magazine, Sheets gave more details, explaining, “Our plant in China is mostly about security of supply. We need to have assets in Asia to be close to customers.”

Transfer of manufacturing to the Zhuhai plant will mostly involve components and materials made at a plant in Deer Park, Texas, he added. “Initially, additive components rather than full packages will be shipped from Deer Park for blending in Zhuhai, which will combine and blend the components there.

“Deer Park will see no jobs lost or changed,” he continued, “and will have plenty to do, with no immediate big impact. And with less pressure on capacity, we’ll be able to improve our customer response time and better serve the domestic and Americas markets.”

Sheets’ presentation was closely attended and generally well-received. A listener from Europe’s lubricant blending community confided that he found the emphasis on ROI to be off-putting. Others were upbeat, and said additive suppliers deserve to be rewarded for their contributions to the lubricants industry. And many reacted positively to Lubrizol’s commitment to new capacity, supply security and R&D.

“It’s important to hear that. We welcome the news,” a North American lubricant manufacturer enthused.

More of the interview with Sheets appears in the April issue of Lubes’n’Greases. To subscribe or read the full article, visit www.LNGpublishing.com/LNGmagazine/index.cfm.