GF-3 Wobbly Out of the Gate


If lubricant producers hoped for more comfortable margins for the newest generation of passenger car motor oils, they may be disappointed by early indications.

Led by major oil companies, lubricant producers began over the summer to introduce motor oils that meet the new ILSAC GF-3 specification, needed for model year 2002 passenger cars. Automakers developed the standard and the American Petroleum Institute is licensing oils that meet it under a new category, SL.

As expected, prices for the new oils were marked up from the predecessor category, SJ, which meets the GF-2 specification. However, those prices appear to be eroding already.

Glenn Krasley, vice president of Bensalem, Pa., blender Advanced Lubrication Specialties, said majors doing business in his region started off pricing GF-3 products 24 to 26 cents per gallon higher than GF-2 products. Now the mark-up has been reduced to 6 to 12 cents.

I hate to see that because I think the higher price is warranted, Krasley said. I think the whole industry was hoping that GF-3 was going to present an opportunity to return to some healthier margins. But I think this raises the question of whether thats going to happen.

He said Advanced Lubrications own GF-3 products, while priced below those of majors, have followed the same general trend. Other independent blenders and distributors reported seeing GF-3 mark-ups shrink in other parts of the country. Majors contacted for this article either declined to discuss margins or could not be reached for comment.

Industry insiders offered a few possible reasons for mark-ups not holding. Some cited the competitiveness of todays motor oil market. Others noted that the industry had already raised prices over the past year as it tried to keep pace with rising oil costs.

Coming on top of the previous increases, its possible that the market just couldnt sustain much more of a price increase, said John Hermansen, general manager for Jones Oil, a Castrol distributor in Houston.

Several sources said it appears that majors that have introduced GF-3 oils have ceased production of GF-2 oils or plan to do so soon. Some speculated that this may give a temporary advantage to independent blenders that continue offering GF-2s at prices that are lower, even after mark-ups are reduced.

There seems to me to be an opportunity, at least in the short-term, Krasley said. The majors are going to be selling nothing but GF-3 but a majority of vehicles are not going to need them. Unless you have a brand new car, youre not going to need GF-3 and I think most people are not going to pay the higher price if they dont have to.

Any such advantage would be short-lived, according to David Turner, automotive lubricants product manager for Conoco, which plans to convert all of its motor oil production to GF-3 within the next several weeks. Turner noted that after March 31, 2002, API will onlylicense GF-3 products to bear the institutes importantstarburst symbol, although GF-2/SJ oils will still be allowed to carry APIs donut.

I think just about everybody in the industry is going to feel like they have to (switch), he said.

In the long run, independents and majors agree that everyone would be better off if GF-3 oils sustained healthy mark-ups. Lubricant companies claim higher prices are warranted because GF-3 products last longer, improve fuel economy and reduce air emissions. American motorists, however, have a reputation of being unwilling to pay more for higher quality motor oils.

I would have hoped that we would have gotten value added for the new technology, in order to ease some of the pressure weve had on margins, said James A. Taglia, president of Nor-Lakes Services Inc., a St. Paul, Minn., blender. But if we dont, I cant say Im surprised.

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