Ground Shifting Under Lube Additives


Prices for lubricant additives rose sharply over the past year. In that respect, they fit in perfectly with most inputs for lubricant blenders. Base oil, energy, transportation and packaging costs also climbed, largely because of steep increases in the price of crude oil.

Crude has affected additives, too, but observers say other factors have also played a role. Supply of a number of key chemicals used to make additives has been taxed by growing consumption, sometimes from competing industries. In addition, markets for some materials have been hampered by production disruptions. While the particulars vary from chemical to chemical, the effects for a variety of materials have been the same: basic changes in the balance between demand and supply.

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Furthermore, additive and chemical suppliers warn thatreluctance to invest inchemicals manufacturing capacity means there is scant prospect of these changes being undone. Availability of key lubricant additive building blocks is likely to remain tight for the foreseeable future, they say, and additive costs high even if crude prices fall.

Its a confluence of rapidly rising crude, capacity rationalizations by chemical companies and a really booming economy, said Lubrizol Additives President Stephen F. Kirk. You put all of those things together, and it has led to some fundamental shifts in demand-supply balances for a number of materials important to our industry.

Lubricant additives underwent several rounds of price hikes in 2004. In the automotive segment, suppliers say, that was partly due to upgrades in industry standards. Specifications such as GF-4, the passenger car motor oil standard that hit the market in July, causedadditive companiesto incur substantial research and development costs – which they are trying to pass on. GF-4, like other upgrades, also required higher additive content levels, another way of raising costs.

But market sources say additive costs were impacted even more by costs of chemical components. Many key materials are oil derivatives, and therefore tied to crude costs. But other factors were also at work in the past year.

As an example, several observers pointed to maleic anhydride, a key ingredient in dispersants. The market for this material had experienced significant surpluses since 2000, when recession curtailed demand for manufacture of boats and buildings, its largest customer segment. So flush was supply that Ashland Specialty Chemical shuttered one of its two U.S. maleic anhydride plants in 2001.

Demand from the boat and building industries began recovering the past few years, growing at annual rates of 3 percent to 4 percent, bringing demand back close to 95 percent of capacity utilization. Then, in 2004, demand shot up.

The [boat and building] segment grew 10 percent or more last year, and even the people in that industry didnt expect it, said an industry source, who spoke on condition of anonymity. Some customers went up 20 percent, but no one was ready for it.

To compound matters, all five major North American suppliers experienced supply disruptions. Caught between rising demand and crimped supply, some put customers on allocation. Since oil additives constitute a relatively small customer segment, additive manufacturers were pushed toward the back of the line in the scramble for material. Prices in the United States rose more than 50 percent in the past year, but some buyers were forced to buy imports, which are priced still higher.

Observers say it may be some time before customers find respite. Maleic anhydride is capital intensive, and no plans for significant new capacity have been announced. Ashlands mothballed West Virginia plant is one source of hope, but it has been tied up in Ashlands proposed exit from the Marathon Ashland Petroleum joint venture. The deal, announced last year, calls for Marathon to acquire Ashlands maleic business. The transaction was held up while the companies sought a favorable ruling about the tax treatment is would receive from the U.S. Internal Revenue Service. (Ashland said recently that it received an unfavorable ruling and that the deal will probably fall through.)

About the only thing on the horizon that would increase supply is if Ashland restarted its plant, the anonymous source said. But I dont think anyone knows whether thats going to happen.

Observers say a number of other key additive components have also been affected by combinations of higher demand and reduced or level supply. Demand for antioxidants has surged the past year, due to stricter performance requirements from new specifications for passenger car and diesel engine oils, and for automatic transmission fluids.

At the same time, supply issues hampered availability of each of the three major types of antioxidants – phenolics, aminics and polymers. The biggest factors have been tightened supply and steep price hikes for building blocks such as benzene, olefins, aniline and poly methacrylates.

Increased demand for polyalphaolefins strained supply of building block decene last year, according to producers. In addition, competition from alternative industries has helped drive up costs for feedstock.

Ethyleneamines, which are used as chemical intermediates to make lubricant additives, have experienced worldwide increases in demand, but no significant new sources of capacity have entered the market since 1998.

Since that time, demand has grown significantly with the emergence of China as an economic power, along with the overall improvement in the global economy, said Kevin Dillan, global business manager of Dow Amines. Several ethyleneamine products that have historically been readily available are now short in supply.

Additive suppliers say the changes with these and other materials add up to a profound impact on their industry.

[These changes in demand-supply balances] are not happening to everything that we use, although everything is going up based on the cost of crude, Lubrizols Kirk said. This special tightness is probably affecting about a dozen materials, which account for about half of the key raw materials that make up the bulk of our [lubricant additive] operations.

He and others stressed that cost is not the only issue. In some cases, it is now trumped by availability – or lack thereof.

There are a series of key raw materials – more than just a couple – where supply is a month-to-month issue, an executive at another additive company said. We have suppliers of those materials coming to us on a regular basis saying, If you keep your volumes to the levels theyve been at in the past, we can take care of you, but we really cant guarantee supply above that.

Chemical and additive companies say these changes add up to a new paradigm for their industries – one in which suppliers and customers must plan more diligently and communicate more closely about future needs.

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