Additive supply and demand were thrown out of balance in 2005, Sheets said, pointing to raw material shortages (for example, olefins and base oils) and the two U.S. Gulf Coast hurricanes that knocked 60 percent of U.S. Group II capacity and 30 percent of the worlds lube additive capacity offline. But industry coped, Sheets noted. Additive suppliers cooperated; there was some inventory in the supply chain; some suppliers declared force majeure; and bigger companies leveraged global production capacities.

The roots of the current additive supply situation, however, go back well before last year. The oil companies goal to improve return-on-capital-employed has driven change. It has forced oil company consolidation to get economies of scale, Sheets said. The result has been consolidation in the additive industry. And consolidation by oil companies means increased buying power.

Sheets, based in Wickliffe, Ohio, noted that 12 oil companies supplied 50 percent of the worlds lubricant supply in 2000. Today these 12 are just six – ExxonMobil, Shell, BP, Chevron, Total and Valvoline – who together with the Chinese giants Petro China and Sinopec nowlead the world market.

Similarly, in 1990 there were nine companies producing additive packages. Today, said Sheets, there are just four: Lubrizol, Chevron Oronite, Infineum and Afton.

Lubrizols response to these market forces has been to shut down smaller production units, Sheets continued. For example, Lubrizol used to make ZDDP at seven plants; now its made at just two. Overall, Lubrizol has added as much capacity as it has removed, with consolidation at major plants in the United States and France, and investment in growth markets in China, India and Brazil.

Select raw materials, including base oils and sulfonates, were in very tight supply before 2005 and are likely to remain tight, said Sheets.

Turning to factors influencing lubricant demand, Sheets noted that the single biggest negative factor is extended drain intervals. Smaller sumps are another small factor. On the positive side are increases in miles driven and vehicle population growth. China and India are the fastest growing markets for lubricants and lube additives. The large U.S. market is flat, and both Europe and Japan have shrinking appetites for lubes and additives.

One bright area, Sheets noted, is marine lubricants, an area that has seen 8 to 10 percent growth in the past decade. But a realistic projection going forward is 1 to 2 percent annual growth.

Over the past 10 years the global market for finished lubricants has declined 0.2 percent per year, and Lubrizol believes this trend will continue through 2012, despite more optimistic projections from some industry consultants.

Sheets predicted global additive demand will increase from 0 to 1 percent per year, with this small growth attributable to lube quality upgrades.

In a separate presentation to the ICIS conference, Infineums Brian Crichton, manager, industry liaison, noted that his company sees a similar picture. Crichton projected very modest growth of about 0.2 percent per year in global lubricant demand, while predicting global additive demand will grow 1 to 1.2 percent per year in the 2005 to 2015 period.

Looking to the future, Lubrizols Sheets noted that additive companies need to minimize supply risk for their customers by implementing contingency plans and global supply chains. Global sales and operations planning is the key to meeting customer needs, Sheets said. There is adequate additive capacity to meet demand.

In 2005, events were extraordinary, but it could happen again.