ILMA Slams Pricing Practices


The Independent Lubricant Manufacturers Association on Monday said it is preparing to submit comments to the Federal Trade Commission, renewing its criticism of pricing practices of major oil companies, particularly for long delays between their base oil price increases and their ensuing finished lubricant price hikes.

Independent blenders buy base oils from the majors and compete against them in the sale of finished lubricants.

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ILMA continues to be concerned that its members are covering their suppliers delays in finished lubricants price increases through the immediate base oil price hikes, said ILMA General Counsel Jeff Leiter. We want to convince the FTC that it is time for the agency to take a hard look at the level of competition in the lubricants industry, especially for base oils.

In recent months, with crude oil costs rising sharply, ILMA members have complained that they have received numerous base oil price increases from suppliers that become immediately effective. Alexandria, Va.-based ILMA pointed out that the same suppliers delay finished product price increases for 45 to 60 days, causing a price squeeze on independent lubricant manufacturers.

Anwer Hussain, president of ILMA, said the lag time between base oil price increases and finished lubricant price hikes impacts many members. That puts a lot of burden especially on the members that are really operating on very slim margins, to take that burden, Hussain told Lube Report. He isvicepresident of lubricants for Inver Grove Heights, Minn.-based CHS Inc.

He said that while it hasnt reached the same point as the refined fuels area, where prices fluctuate every day, it is becoming a concern in lubricants. We want to make sure the subsequent finished price increases takes place just as fast as the raw material prices go up, Hussain said. In the past, lubricants raw materials prices have not accelerated at the pace that theyre accelerating right now. It makes it even more troublesome that the finished market prices really dont follow as quickly.

Since the beginning of this year, with the significant run up in crude prices and the frequency of the base oil price increases, were starting to get complaints about serious lag time, Leiter told Lube Report. One example cited by Leiter was Shells finished lube price increase announced via letters to customers May 23, which doesnt kick in until Aug. 5.

Members have complained about being at a serious competitive disadvantage. It doesnt make sense in terms of the rational economics, he said. If these costs are going up, and theyve been putting through multiple base oil increases, why wouldnt the finished prices go up too? Additive prices have to go up, everythings going up – so why the delay?

At issue is the appropriate way to interpret and enforce provisions of the Energy Independence and Security Act of 2007, related to preventing market manipulation in the petroleum industry. EISA includes two sections giving FTC new authority to introduce regulations prohibiting marketing manipulation and to enforce statutory prohibition against provision of false or misleading information in the petroleum industry. The statute describes how the commission could enforce any violation, such as an unfair or deceptive act or practice proscribed by a rule issued pursuant to the FTC act.

The FTC recently issued an advice notice of proposed rulemaking, setting forth questions and issues for consideration by those wishing to submit comments, due June 23.

Our plan is to comment to the FTC that lubricants are critical for our economy and for keeping everything moving, Leiter said. They need to be concerned about competition in this end of the business. Thats why were out collecting data. ILMA has asked its members for assistance with data in preparing comments. Leiter also issued a call for anecdotal information that members could share. The group is collecting historical pricing data on base oils and finished lubricants, he said, especially for the last 6 months.

The only conclusion we can reach is this is a market share grab and theyre trying to squeeze them, Leiter said of the major oil companies. ExxonMobil might say Shells our competition, not ILMA members, but its kind of curious that ExxonMobil is selling base oil to Shell. Exxon raises prices, and the rest of them follow suit the next day by the same amount. Our sense is, weve lost a competitive market for base oils, and thats what is creating the problem.

Echoing Leiters concerns was a mid-size ILMA member who manufactures lubricants, including private label, a house brand, and bulk sold to warehouse distributors. Too infrequent, too small an increase, and too long a lead time on the effective date of the increase, the source said of how the finished lube price notices are handled now.

He said another side of the equation is that big oil companies make finished lubricants with gasoline brands in the marketplace, competing with the private label and house brand lubricant volumes manufactured by independents.

Big oil knows that the consumer buying off the retail shelf wont pay as much, or more, for what we call a private label or house brand at say, an Autozone, the source explained. The consumer wont pay as much, or certainly more for a house brand than he will a gasoline brand. So in a real sense, big oil sets the price on the retail shelf of the finished lubricants, and the independent is squeezed.

He said the delays are especially hard on independents who sell large quantities. Its not uncommon for a mass merchandiser, a big retailer, to buy a million gallons a month from a supplier of his private label or in-house brand stuff, this source said. This independent manufacturer making those products, hes got to wait 60 days to pass along a cost increase of say, 50 cents a gallon. He gets a hit, for a half million dollars a month, because of the behavior of big oil. Thats very real, very documentable – its not speculative.

He said if current trends dont change, there could be serious ramifications for independents. If big oil continues to conduct themselves in this way, there can be an entire market in our industry called independent lubricant manufacturers that can be out of business, the source warned. Its that simple.

The amount of increases weve been getting is just causing us havoc with putting together pricing, and communicating with the customers, another ILMA member blender told Lube Report.

This source said getting only two or three days notice about base oil price changes compounds the problem. Youve got competition, which are the majors. Theyre just sitting there like nothings going on, he said. Their response is something like 30 to 60 days later. So that hurts the independents, which are absorbing the increases right there. It causes a big disadvantage with the end users.

The base oil price increases are so big they have to be passed on, he added. The old 5 and 6 cent increases were somewhat palatable, he said. Youre looking at 25 and 30 cents a gallon increases now, which are major.

This source was hopeful the associations submission of comments to the FTC might have a positive impact. This is new to us, and were not sure what the impacts going to be, he said.

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