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Need to Know


Lubricant sales have and will continue to decline during this recession. And if the 1980 recession is used as a benchmark for this recession, as noted in last months column, we are likely talking about a decline in U.S. lubricant demand this year approaching 18 percent. But thats the aggregate number, based on gross volumes.

To fully appreciate how the recession will likely impact your lubricants business requires peeling back layers of the onion, layers that reveal industry-and location-specific factors, and changes in the value as well as the volume of lubricant sales.

To start, consider that the lubricants industry comprises three distinct market segments – Industrial, Commercial Automotive, and Consumer Automotive. Lubricant demand in these segments is roughly 47 percent, 28 percent and 25 percent of the total by volume, respectively, and 40 percent, 35 percent, and 25 percent by value. Although sales volume and value in each segment are expected to fall off significantly during this recession, the depth and duration of the decline will be different for each. Similarly, the impact of the recession on the various classes of trade that make up the market segments will also differ.

If there is anything to learn from the history of lubricant demand during recessions, its that the Industrial market segment is hardest hit. During the recession of 1980 to 1982, for example, demand for industrial lubricants eroded by close to 20 percent. The Commercial Automotive market segment, which includes on- and off-high-way heavy-duty diesel equipment, was the second hardest hit with a loss in lubricant demand of roughly 17 percent. Least impacted was the Consumer Automotive segment. Although still significant, demand here dropped only about 6 percent.

Peeling off another layer of the onion is even more revealing. This uncovers the fact that although most classes of trade within each of the market segments experience reduced lubricant demand during recessions, some fare far better than others. Moreover, some classes of trade demonstrate near-immunity to recessions and can even experience growth.

Historically, the classes of trade where lubricant demand suffers most in the Industrial segment include transportation equipment, off-highway transportation, primary metals, fabricated metal products, machinery, chemicals, wood and paper products, and tire and rubber. Lubricant demand in several of these segments plunged 20 percent to 25 percent during the severe recession of 1980 to 1982.

This means more trouble for some lubricant suppliers than others. The major oil companies for example are typically leading suppliers of lubricants to the transportation equipment, off-highway transportation, primary metals, and the tire and rubber industries. An estimated 83 percent of these sales is on the majors paper. This is because these industries typically purchase in large volumes and prefer national contracts. Also, a considerable amount of the lubricants consumed in some of these of these classes of trade is process oils, sold direct by majors.

The hard-hit industries also represent bad news for lubricant manufacturers with product portfolios heavy in metalworking fluids. Virtually all of the metalworking fluid consumed in the United States goes into the transportation equipment, primary metals, fabricated metal products and machinery classes of trade. And with automotive and heavy-equipment manufacturers posting huge declines in sales, and the primary metals industry taking a dive in fourth-quarter 2008, its no secret why some independent lubricant blenders are gulping. Independents account for close to 80 percent of U.S. metalworking fluids, and some focus their business almost entirely on these products.

Not just vocation, but location too is a harsh reality of this recession. An estimated 34 percent of U.S. Industrial lubricant demand is concentrated in the Midwest. Nearly 50 percent of metalworking fluid demand is in the same region. This means major oil companies with factory-fill business and strong direct and indirect sales to Detroit and other touchstone cities in the rust belt will have to navigate through some challenging white water over the next year. Independents with a focus on selling metalworking fluids to the Midwest will be in a boat right alongside those majors.

Thats some of the bad news in the Industrial market segment. Now what about the good?

The first piece of good news is that, regardless of economic conditions, some products and services are considered essential. As such, demand for lubricants used to produce these products and services typically do not experience a significant negative downturn during recessions. In fact, lubricant demand in some classes of trade can actually grow.

The classes of trade least impacted by prior recessions include food processing, agriculture, pharmaceuticals, residential electrical equipment, oil and gas extraction, petroleum refining, power generation, defense and the federal government.

Another piece of good news is that the United States government is working hard to breathe life into the economy. These efforts could result in some classes of trade moving out of the recession more quickly than others. Ones to watch include construction, wood and paper products, primary metals and fabricated metal products.

But maybe the biggest piece of good news in this recession is the realities it brings into focus, whether theyre about market segments, classes of trade, volume or value, rust belt or farm belt. In these uncertain times, success begins with addressing the ever-changing needs of the lubricants marketplace. For those that do, this recession will ultimately prove to have been a time of opportunity.

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