The United States lubricants business is moving through a remarkable period of changes that present both threats and opportunities for all participants in the supply chain. Among the most challenging aspect is the accelerated rate at which these changes are occurring and the fact that many are inextricably linked. Because of this, planning is exceedingly difficult and often includes close collaboration with vendors and customers. Preparing for and adjusting to the unexpected is critical, as is the speed at which adjustments are executed.
A recent example of the rate of change and the need for timely and careful adjustments can be seen when looking back over the past year and half of pricing. During that time, there have been five announced increases in the price of finished lubricants. Three occurred in 2018 and two so far this year.
Announcements of the first increase in 2019 began hitting the streets at the end of March and early in April. This increase averaged about 6 percent, with most having an effective date 30 days later in early May. Many producers attributed the increase to the higher cost of base oil and other inputs. But before many of the increases announced in this first round became effective, base oil prices once again moved up.
So, while lubricant manufacturers and distributors were planning to implement their first round of increases for the year, their cost of goods moved up one or two more notches. As result, they faced the decision to either move forward with the first increase and follow up shortly with a second; rescind or revise the first and roll it into a second; or move forward with the first and wait to see how the market would develop before making a decision on a second increase.
Although the decision was complicated by rumblings that additive increases were imminent, in short order nearly all manufacturers made the decision to rescind the first increase and roll it into the second. This was done in an effort to avoid the challenges distributors would face administering two price increases over a short period of time.
Announcements about the combined increase hit distributors desks in the second half of April, with effective dates about 30 days later in May and a combined increase of up to 14 percent. While combining the first and second price bumps relieved distributors of administrative burdens, the magnitude if the price hike did not relieve them of having to effectively resell their customers by explaining the increase. This set off a firestorm of discussion among distributors about the timing.
Although the combined increase seemed to make sense when it was announced, the justification weakened considerably when crude dropped from $74 in the third week of April to below $55 in early June. And early June was when many distributors were meeting with their customers to explain the big increase. They said the increase was a tough sell 30 days later when the price of crude was down. Where they could still point to increases in additive costs and other expenses as the reason, the crude argument was crumbling. And its hard to make price increases stick when this happens; in fact, they often dont.
As an example, if each of the price increases announced over the past 1.5 years were realized, they would have moved todays lubricant price 40 percent higher than those seen at the end of 2017. This would mean that a motor oil selling for $7 a gallon in 2017 would now be selling for close to $10 (which it clearly is not); there is little evidence to suggest that increases stick.
Instead, while most increases are pushed through on their effective dates, they tend to slip over time. This is due to the high intensity of competition in the U.S. market, which is in part a function of declining U.S. demand volume and the number of participants manufacturing and marketing lubricants. In addition, buyers have learned that base oil prices are a major contributor to the cost of finished lubricants, and when base oil prices decline, buyers sometimes flip the argument made to justify the increase in an effort to seek price concessions.
With that, many distributors are now asking some tough questions around the timing of lubricant price increase announcements and the effective dates that typically come 30 days later. Because when suppliers and buyers link the price of finished lubricant to base oil, they are also linking it to crude. And crude prices change in real time, not 30 days after they are announced.
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