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Heavy Weather for Additives


As vice president of operations for Lubrizol Corp., Larry Norwood and the team he heads make it a habit to project the companys raw materials needs. The idea is to coordinate procurement and production in order to streamline operations.

Over the past year, however, that task has taken on a new sense of urgency for Norwoods team – and their counterparts across the lubricant additives industry. During that time, upstream supply of some key chemicals has tightened so much that, rather than getting materials in an optimal manner, they worry about getting them at all.

We always think about planning, and about closely coordinating production and procurement schedules from an efficiency standpoint, Norwood said in a recent interview. But those things have become even more critical now, because if you overlook something or dont anticipate something, it could really impact operations.

This, he and others say, is a new day in the additive industry, inaugurated by fundamental shifts in demand-supply balances that drove up prices for a variety of key materials and made them harder to get. These shifts have been obscured somewhat by last years run-up in crude oil prices, which contributed to hikes in additive costs. But while garnering less attention, observers say, the changes to the demand-supply environment are just as significant and could turn out to be more lasting.

Out of Balance

Supply problems are hardly unheard of in the lube additive market. Given that companies use as many as 200 different chemicals, it would be surprising if they ever went long without some kind of disruption. But individuals interviewed for this article said the problems of the past year are nearly unprecedented in their breadth and depth. A long list of chemicals used in lubricant additives underwent multiple price hikes in the past year, and suppliers imposed sales allocations on some.

Its not happening to everything that we use, said Stephen F. Kirk, president of Lubrizol Additives in Wickliffe, Ohio. But this special tightness is probably affecting about a dozen materials, which accounts for about half of the key raw materials that make up the bulk of our [lubricant additive] operations.

Its probably impossible to know how much of the rise in chemical prices is due to crude and how much to demand and supply. Crude certainly played a part. Between February and October, prices jumped more than 60 percent to record levels above $55 per barrel. A number of additive building blocks are petrochemicals, so of course, they were directly affected. Higher oil and natural gas prices also inflated energy, transportation and packaging costs, all cited by suppliers raising chemical prices.

Still, additive and chemical companies say a number of other demand and

supply factors also came into play – and that overlooking them means failing to grasp important changes to the industry. Markets for some materials suffered short-term supply disruptions in 2004. For example, unscheduled shutdowns struck all five of North Americas major sources of maleic anhydride, a primary component of dispersants. A fire temporarily side-lined a Crompton Corp. plant in Elmira, Ontario, that produces high-viscosity polyalphaolefins and alkylated diphenylamine antioxidants. Supply of decene alphaolefins, the main ingredient in PAO, was also disrupted, sources said.

Some materials saw increased demand from the lubricants industry. Most prominent were antioxidants, as consumption of both phenolic antioxidants and alkylated diphenylamines rose steeply to help meet tougher requirements for engine oils and automatic transmission fluids.

Some suppliers were saying they expected their demand to go up 20 percent, said Mike McHenry in Washington, N.J., a former research and development executive at Castrol and now an industry consultant. Instead it went up 50 percent. Evolving standards and engine designs also increased the need for dispersants. Demand for PAOs – used as base stocks and in additives – continued to rise.

Payback for Chemicals

Most observers agree, however, that the biggest factor affecting markets the past year was growth in the global economy – and the failure of manufacturing capacity to keep pace. Chinas burgeoning growth sucked up increasing volumes of many different chemicals, the U.S. economy had its best year since 1999, and performance in other parts of the world improved, as well.

The problem was that chemical companies had not built or expanded factories to accommodate that growth. Their reasons, say observers, stem from the industrys experience over the past decade, when many markets had chronic overcapacity. Chemical suppliers suffered through several years of unsatisfactory returns, and some closed manufacturing facilities. Ashland Inc. closed one of its two U.S. maleic anhydride plants in 2001. Refiners closed numerous Group I base oil plants in recent years, cutting production of an important additive diluent.

Consequently, many chemical markets were running close to full tilt by early last year, and it did not take much additional growth – or much disruption in supply – to throw them off kilter.

This was not a surprising development for the chemicals companies, said Thomas Engelhardt, global head of lubricant additives for Ciba Specialty Chemicals in Tarrytown, N.Y. Profits have been too low in recent years for them to justify investing in additional capacity. Companies have been running plants very tightly, running inventories very tightly, and then you have this sudden and unexpected surge in demand.

Scramble for Supply

Too much demand started chasing too little supply of a number of basic additive building blocks: benzene used in aminic and phenolic antioxidants; olefins used in aminic antioxidants and PAO; chlorine used to make ethyleneamines, another key component of dispersants. The result was more upward pricing pressure.

Add the tight raw material situation to the higher raw material cost and you have a significant impact on the alphaolefin raw material costs when producing PAO, said John D. Dennerlein, global marketing director of antioxidants and synthetics for Cromptons Petroleum Additives business in Middlebury, Conn.

Where shortages occurred, the lube additives market had to stand in line behind larger customer segments. For example, the construction and boat manufacturing industries consume 50 to 60 percent of maleic anhydride production, compared to just 10 percent for oil additives. Demand from the construction and boat segment shot up by double-digit rates in 2004, and the unexpected surge – coupled with the markets supply disruptions – forced suppliers to implement sales allocations.

Failing to make most-favored-customer lists, lubricant additive makers had to scramble for material, even after prices jumped more than 50 percent. Some U.S. buyers were forced to import Asian products that cost 30 percent more – before transportation costs.

It all depended on your contract position, said one maleic anhydride marketer, who spoke on condition of anonymity. If you had a contract for a certain amount of volume, you were paying more, but at least you got what you needed. If you needed 10 percent more, it wasnt available. If you werent fully contracted, you found yourself possibly having to go completely to imports. In that case, your cost could have gone from X to 2X.

A New Day

All these issues stacked up to create a lot of pressure for additive suppliers. Higher costs ate into margins, although companies tried passing some of the burden on to customers. Additive prices underwent four rounds of increases last year. Even so, concerns about costs in some cases took a back seat to availability.

The idea that its really not the cost of the component, but a question of is it even available – thats something new for this market, said an executive with another additive company. There are a series of key raw materials – more than just a couple – where supply is a month-to-month issue. 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 anything beyond that.

Additive suppliers say the industrys new climate makes it more important for customers to project their future needs and communicate them to suppliers. They also warn that the market is more vulnerable now to disruptions – be they plant shutdowns or increases in needs for specific chemicals. The latter is almost sure to occur. Passenger car motor oil marketers are still phasing in formulas to meet ILSAC GF-4, the year-old standard most responsible for the surge in antioxidant demand. As oil marketers convert more of their products, sources say, antioxidant demand should rise further. And more specification upgrades are scheduled for the next few years.

Further lubricant performance upgrades could exacerbate the situation with certain tight materials, said Andrew Paxton, director of purchasing for Afton Chemical in Richmond, Va. Translation: Things could get worse, rather than better.

Additive and chemical companies say new demand-supply balances could persist for the foreseeable future.

We do not believe the situation will reverse in the short to medium term, Paxton said. He added that only two things could undo the new tightness – a downturn in the global economy or construction of new capacity – and that neither appears likely anytime soon.

The economies of the U.S. and China are showing no signs of cooling, he remarked. The chemical industry has not been adding capacity in recent years due to poor returns. Even with the recent improvements in the margins on basic feedstocks, new capacities are not being announced, and it would generally take two to three years to see the capacity anyway.

If chemical supplies do remain tight, observers say, prices could stay high even if crude falls significantly. Indeed, chemical and additive companies say there is still upward pressure in their markets despite the fact that crude has already retreated somewhat.

It sounds as though additive companies and their customers may need to become accustomed to higher costs – and that work may remain hectic for Norwood, Paxton and others in procurement.

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