Word among some of the movers and shakers in lubricant distribution is that the cart may have come before the horse with the new API CK-4 and FA-4 heavy duty engine oil categories. They believe that while the first official licensing date for the new specifications is Dec. 1, 2016, demand will, at best, be soft for a year or two-or maybe more.
Although some OEMs recommend use of these higher performing oils, they do not currently require use (an important subtlety). Second, the new specifications come with additional costs to blenders and marketers and consequently a higher price for end users. To underscore this point, consider that the industry has already invested over an estimated $500 million in developing and deploying the new HDEOs.
Although schools not out on how much more they will pay, some recently announced prices for the new juice suggest it will cost distributors about 5 to 6 percent more than CJ-4. This translates to roughly 25 cents to 35 cents a gallon at the distributor level.
Understanding the price difference, and that the new specifications are not required but a nice option, demand for CK-4 and FA-4 will likely be driven more by push than pull in the near term. And you can be sure there will be plenty of effort to push.
The value proposition for the new oils is fairly clear and likely to resonate with operators of newer equipment and large fleets. The new categories deliver improved oxidation and high temperature/high shear stability over that of CJ-4, which helps in extending drain intervals and engine durability. They also provide superior aeration resistance. Adding to these advantages, FA-4 oils offer added fuel economy (0.5 to 0.7 percent higher than CK-4 for the SAE 10W-30 viscosity grade) and reduced CO2 emissions.
Its all good stuff and its been a long time in coming. The current CJ-4 standard has been in place for 10 years, during which time there have been significant advancements in power platforms. In addition, we are looking at more stringent greenhouse gas regulations for diesel engines starting in 2017 and continuing mandates to increase fuel economy.
But as history has shown, there is more to the story than the direct costs and benefits of new specifications. That brings us to the second challenge: distribution.
Close to 80 percent of the lubricants (excluding metalworking fluids and process oils) sold in the U.S. are touched by marketers. Regardless of whether its sold on their paper or on the majors behalf, marketers inventory and deliver most of the lubricant sold to end users. This means they have a big say in the lubricants that are pushed and pulled through the channels. As we saw when CJ-4 entered the market back in 2006, the adoption rate of a new category is slow when the old one still has legs, as was the case with CI-4 PLUS. In part, this is because many end users did not buy into the value proposition of CJ-4. Instead, they hung on to the old and took a wait-and-see approach before embracing CJ-4.
Many marketers did the same. Rather than converting bulk tanks from the old to the new, they waited for demand to build to a point where it made sense to take on the inventory carrying costs, a particularly significant commitment when dealing with bulk tanks. Very few lubricant marketers have empty bulk tanks, let alone space to put in new ones. As a result, they carefully metered in the CJ-4 in pails and drums until a critical mass was reached to justify carrying it in bulk.
Market development for CK-4 and FA-4 could prove to be analogous to how demand played out with CJ-4, only more complicated. With two new specifications and considerable life still left in CJ-4, marketers will likely be inventorying and selling at least three types of HDEO in at least five viscosity grades for CJ-4 and CK-4, and two grades for FA-4. That adds up to seven new HDEO SKUs and even more when one factors in conventional and synthetic products. That number of SKUs can double, triple or more for multi-branded marketers. This complicates inventory carrying costs and distribution logistics, and drives up selling costs.
With that, its a safe bet that most marketers will be slow to inventory significant volumes of the new HDEOs. Instead, they will likely follow the path taken back in 2006, waiting until demand builds before taking on the products in bulk.
Regardless of how long it takes before demand for CK-4 and FA-4 capture significant market share, you can be sure the additive companies, majors and others that invested heavily in the new specifications will be pushing hard to drive demand. And if in the process, they can reduce the weight of costs, the horse may move ahead of the cart and gain traction to pull CK-4 and FA-4 into the market at an accelerated pace.
Tom Glenn is president of the consulting firm Petroleum Trends International, the Petroleum Quality Institute of America, and Jobbers World newsletter. Phone: (732) 494-0405. Email: tom_glenn@petroleumtrends.com