The ability to withstand or recover quickly from disruptions in the lubricant supply chain is more challenging now than in the past, and the stakes are much higher due to a number of reasons, one of which is consolidation.
In addition to consolidation of lubricant marketers, as most are aware, there has been considerable consolidation of base oil suppliers over the past 35 years. In 1985 there were 37 base stock refineries in the United States with a total paraffinic base stock capacity of 169,000 barrels per day. Today there are 27 refineries with capacity totaling 277,000 b/d. Whats more, 87 percent of capacity is produced by seven plants, and five of those, which collectively account for 67 percent of API Group II capacity in the U.S. and Canada, reside in a corridor where hurricane activity is common. This means fewer plants are producing significantly greater volumes, and a large percentage of that volume is sourced from areas at high risk for hurricane damage.
In addition to its impact on base oil, consolidation has compounded risks in the additives business.
In the 1980s, there were primarily seven companies in the U.S. manufacturing motor oil additives, including Lubrizol, Texaco Chemical, Oronite, Exxon Chemicals Paramins Division, Ethyl, Amoco Chemical and Shell Chemical. In 1998 Exxon and Shell merged their additive businesses in a 50-50 joint venture, which is now Infineum. Ethyl acquired Amoco Petroleum Additives in 1992 and Texaco Additives in 1996, and in 2004 changed its name to Afton Chemical Corp. With this consolidation, there has been rationalization of capacity and a net reduction in supply points. Further, well over 50 percent of the additive capacity is located in regions affected by hurricanes.
Beyond the visible risks associated with few suppliers and supply points, there are other issues to consider when assessing the resilience of the additive supply. These issues concern the complexity of additive packages and their dependence on the many raw materials required in their manufacturing.
Motor oils contain some of the most complex and sophisticated additive systems used in the lubricants business. They are most commonly purchased in carefully balanced, extensively tested and approved additive packages, which include such functional classes as viscosity
modifiers, detergents and dispersants, antioxidants, antiwear, friction modifiers, pour point depressants and rust inhibitors. Each function class comprises chemical compounds that are manufactured from a wide range of raw material.
In the case of detergent additives, for example, key raw materials include calcium and magnesium oxide. These materials are derived from limestone, dolomite, gypsum and others that are sourced from companies that quarry and refine minerals.
Lubricant manufacturers also depend on outside sourcing for other raw materials used to manufacture the chemical compounds that make up additive function classes. Some of the most critical of these include amidic acids, phosphorus pentasulfide, polyisobutylene, ethylene, alcohols, phenol and olefins.
Importantly, an interruption in supply of even one raw material can sideline production of the entire additive package. As an example, if one of the limited numbers of global suppliers of magnesium oxide were unexpectedly to stop production, an additive manufacturer may have to scramble to switch to another supplier and in the process face logistical challenges and approval and licensing issues.
This can also occur if a fire, flood or explosion shuts down production at a chemical plant, or storage at a terminal, as we saw earlier in the year when a fire broke out at Intercontinental Terminals Company in Deer Park, Texas. This fire disrupted many businesses located in Deer Park or that relied on the Houston Ship Channel for their supply chains. Only the additive companies know how secure their supply chain is in the event of an emergency and what their weakest links are.
So, whether its base oil or additives, the lubricant supply chain is complex, and there have been and will continue to be unexpected interruptions. While both base oil and additive manufacturers have demonstrated incredible resourcefulness in an effort to adjust to unexpected events, it is important to consider that as participants in the lubricant supply chain increase in size due to consolidation, so do the risks and impact of supply interruption. For this reason, it is increasingly important to ensure suppliers, regardless of where they sit in the supply chain, have solid contingency plans in place, including adequate inventory to buffer interruptions when they do occur.
In todays complex and highly competitive lubricants business, it is tempting to keep inventory costs down, but the cost of doing so can be very high if the spigot runs dry. One incident could wipe out years of savings for a company that has been managing inventory to lower levels, not to mention the impact on customers and businesses that rely on the lubricants industry.
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