SCOTTSDALE, Ariz.-Organic growth may not be in the cards for the lubes industry, but the market is far from stagnant, Annie Jarquin of Kline & Co. told the Independent Lubricant Manufacturers Associations members at their annual meeting here last week.
It may be flat, but theres so much happening within it, Jarquin reminded the group. The key question for lubricant blenders, she said, is Can you react fast enough to keep up with the changing dynamics within this flat demand?
North America consumed about 9.3 million tons of lubricants last year. While industrial lubricants led in volume with 3.7 million tons valued at $10.9 billion, automotive engine oils led in value, pulling $10.4 billion for just 1.8 million tons. You can see its the consumer piece that has the value, Jarquin emphasized.
In the automotive segment, original equipment manufacturers are rapidly changing the factory and service fill landscape and creating opportunities for more synthetics, Jarquin reported. In North America, the market share of higher viscosity engine oils is shrinking as higher quality lubricants at lower viscosity grades grow in popularity. Heavy duty motor oils are also lightening up a bit, and better antioxidant, antiwear and extreme pressure performance are part of the trend.
Being that the supply and demand situation is pretty ripe for synthetics, Jarquin said, theres a lot of people in the game. Its not a space dominated by the global majors anymore. She continued, Youve got retailers in the game, and youve even got distributors in the game. Its a crowded space now.
Almost half of all lubricants blended in the U.S. are sold directly to end users, according to Kline. Distributors are a close second at 45 percent, followed by auto parts stores and mass merchandisers at 4 percent each. In general, products such as process oils, industrial engine oils and metalworking fluids tend to be marketed directly to the end user, explained Jarquin, whereas a high percentage of general industrial oils and greases move through distributors.
In contrast, 30 percent of consumer automotive oils are sold directly to the consumer, while distributors handle 42 percent, auto parts stores sell 14 percent and mass merchandisers sell the remaining 13 percent.
Commercial engine oils are sold mainly through distributors and jobbers at 67 percent. Only 35 percent is sold directly to end users.
Gross margins within the engine oil value chain present an interesting picture, as calculated by Kline. For a five-quart jug of SAE 5W-30 synthetic blend motor oil sold in mid-2016, the Group II base oil refiner made about $1, the blender $4 and marketing and distribution a combined $4.50. Retailers took the lions share of about $11.50.
Blenders arent hurting, however. With low crude prices and weak base oil margins, theres above-average profitability for lube blenders, Jarquin reminded. With the crude price crash, base oil is priced lower, but we havent seen the same reduction in finished lube prices.
Higher crude prices in the future may mean higher base oil prices, but overcapacity will continue to depress base oil margins below reinvestment levels, said Jarquin. Its likely that blenders will only have to absorb crude oil price increases as API Group II, Group III and Group III+ stocks remain abundant and competition between base oil suppliers gets even tougher.
The distribution situation in the U.S. is really the most challenging piece in terms of the dynamics and the activity happening, Jarquin pointed out. In the last two years, PetroChoice, RelaDyne and Brenntag have grown to control a significant amount of the situation.
All of the major distributors follow a multi-brand strategy, some with private-label products. Private label has evolved from a low-priced commodity such as hydraulic fluid and gear oil to a complete portfolio of PCMOs and in all formulation types and [with] leading OEM and industry approvals, she reported. Private-label volumes can even be higher than branded volumes for distributors.
These days its hard to find fault with private label. Theres packaging, depth, performance, approvals, marketing support and customer ambivalence, said Jarquin. Theyve narrowed and potentially eliminated the advantage that branded lubricants have held for so long.
U.S. distributors still tend to lead sales with top-tier brands, according to Kline. But given customer preferences and price sensitivity, sales representatives will often migrate to second-tier and private-label products to secure business. The problem for blenders, Jarquin said, is that customers are not inclined to move back to the higher value, branded option. This means we will continue to see a deep decline in branded offerings, she predicted.
Advances in technology will produce the most disruptive changes in the lubricants landscape, said Jarquin. I think the lubricants business is a pretty conservative space and has been in the past dominated by supply. But ultimately, the demand characteristics are changing, and theyre changing fast.
Shifting car ownership models, in particular, point to OEMs having a much larger role in the industry supply chain. Jarquin imagined that self-guided cars will eventually drive themselves to be service-filled with whatever oil the manufacturer recommends. With no consumer choice involved, the quart bottle may largely disappear. Blenders and marketers will have to find a new strategy to build relationships with consumers and influence decision-makers in order to compete effectively.
On the industrial side, trends in end-use industries like minimum quantity lubrication and 3D printing are already beginning to have an effect.
Theres no way to tell how fast these changes will come, Jarquin cautioned. Will the industry be ready?