Although we hadnt seen one for a while, they showed up in the inboxes of lubricant blenders in the first quarter of 2014: announcements by lubricant additive manufacturers that prices were going up.
Such adjustments are nowhere as frequent as hikes in base oil prices, but these increases were dropped on blenders desks at nearly the same time that base oil prices were marching up. That certainly got their attention, and for good reason. Additives account for roughly 35 percent to 40 percent of the cost of goods for engine oil, and when both base oil and additive prices go up, finished lubricant marketers have a lot of explaining to do with their customers.
Rumblings about additive prices started in February, and were substantiated in March. This is when additive suppliers advised their customers that prices would be going up in May and June by 4 percent to 6 percent, depending on supplier and additive type.
Interestingly, these notices were quickly followed by more announcements, saying the effective date of the changes would be delayed by a month or so. Although some speculated this could mean the increases were on a path to being rescinded, this was not the case. Instead it may have been simply a buffer to allow additive suppliers more time to manage the message.
In fact, at this writing in mid-May some of the additive price increases are already taking root. Even so, the questions keep coming: Why raise additive prices, and why now?
According to the additive suppliers, there are a number of reasons. One, as blenders are quick to grasp, is that higher base oil costs will drive up additive prices. This is because roughly 45 percent of an automotive engine oils additive package consists of base oil. Its used as diluent to solubilize the additives, and make them less viscous and easier to handle.
Since base oil prices are relatively transparent and blenders are aware that they have been firming this year, it helps explain why the cost of additives would climb at this time, too. Whats more, this issue is so transparent and known that its influence on additive cost can sometimes be built into supply contracts. But there are other issues behind the recent rise in additive prices which may be more important than raw materials costs- and are far less transparent.
First, its important to acknowledge that the price of lubricant additives has been relatively stable for a long while. In fact, there has not been a broad-based additive price hike announced in nearly three years. During this period, however, there have been a number of factors contributing to the escalation of product costs.
The cost of product development, for example, has increased considerably as a result of higher engine testing costs. In addition, the added complexity and growing number of engine tests required with each oil category upgrade adds considerably more expense. Looking ahead, the next generation of passenger car and heavy-duty diesel motor oils – GF-6 and PC-11, respectively – promise to be the most expensive ever developed. To appreciate why, one doesnt have to look much further than the fact there will be two types of PCMO debuting (GF-6A and GF-6B), and both require heavy lifting to meet their April 2016 deadline.
In addition, automobile manufacturers and diesel engine builders increasingly are writing their own specifications and layering these on top of the industrywide categories. These new specifications bring with them a large number of additional and expensive tests. Further, they challenge the performance limits of existing additive technologies. As a result, additive manufacturers are working to develop new components and products, at substantial cost.
In addition, added levels of cost are being incurred with the proliferation of new base oils around the world, and from the wider range of viscosity grades that must be supported as OEMs migrate to lower vis grades for reasons of fuel economy.
Theres more. Costly and complex regulatory mandates also are soaking up additive company dollars. Europes chemical registration scheme (REACH) and the Global Harmonized System for product labeling, to name just two, have swollen the cost of developing new componentry and bringing it through to market.
Higher additive costs are also driven by capital investments additive manufacturers are making to put steel in the ground to meet growing demand in China and other countries. And although this could be a sticky issue for North American blenders, ultimately the new capacity and investments to upgrade current plants will help additive suppliers manage costs and maintain high levels of technology excellence and supply reliability.
Needless to say, there are many moving parts that drive the cost of additives, and some of these parts are moving behind closed doors. Because of this, its not hard to understand why some blenders suspect there is more to the story. Theyre raising questions about the plus in cost-plus, the lofty expectations for return on capital investment, free-market issues, and other unspoken motives.
If there is any reality to these beliefs, they hardly matter at this point. What matters immediately is the fact that additive costs have gone up. And if the higher costs of additives and base oils are not passed on to finished lubricants, you can be sure margins will go down.
Tom Glenn is president of the consulting firm Petroleum Trends International, and of the Petroleum Quality Institute of America. He currently is updating the multi-client study Lubricant Supplier-Distributor Relations. Phone: (732) 494-0405. E-mail: tom_glenn@petroleumtrends.com