As most in the lubricants business are aware, the intensity of competition has been particularly high over the past decade. There are several reasons why, including consolidation, private label gains, challenges to product differentiation, growth of do-it-for-me services, the high fixed costs to blend and distribute lubricants, and the scale a business builds to cover these costs.
Although each of these factors intensifies competition in the lubricants business, there is another insidious reality stoking competition, and its the size of the pie.
The United States lubricants business was one of the first to emerge and is a leader in the move from mature to declining demand dynamics. Because of this, the volume consumed in some sectors of the business will slowly sink as demand rides up and down on the waves of the economy.
Based on Petroleum Trends Internationals preliminary estimates, U.S. lubricant demand reached 2.47 billion gallons in 2019, a decline of 0.8 percent from 20 years earlier. While one might think the drop is relatively unremarkable and could even be regarded as flat considering the degree of uncertainty around such data, a very different picture emerges when looking at demand in each of the U.S. lubes business three market segments.
Accounting for 52 percent of total lubricant demand, industrial lubes represent the largest slice of the pie. Demand in this segment moved from 1.26 billion gallons in 1999 to an estimated 1.27 billion in 2019, increasing this largest segment of the business by just over 0.8 percent.
While industrial sales ended 2019 in fairly good stead, its important to consider that there were ups and downs over the past 20 years. This is because demand for industrial lubes is heavily influenced by the economy, particularly the manufacturing and construction sectors. Demand took a significant hit when the economy contracted around 2009.
Over the past 10 years, however, demand has been slowly inching up. While longer drain intervals have somewhat eroded volumes, the economy still has the greatest influence on demand in this segment.
Similarly, demand in the commercial automotive segment is also influenced heavily by the economy and experienced a marked decline around 2009. Unlike the industrial segment, however, extended drain intervals are biting more deeply into heavy-duty engine oil demand. But assuming the U.S. economy continues to perform well over the next five years and demand continues on the glide path it was on in the 2010 to 2019 timeframe, extended drains could be offset by gains due to the economy. There could even be modest growth.
This, however, is an unlikely scenario since extension of drain intervals has been gaining momentum over the past five years, partly masked by increases due to the vibrant economy. A more likely scenario is that demand for HDEO will decline fractionally each year over the next five.
Passenger car motor oil, however, is the one segment of the lubricants business where there is more certainty about where demand is heading, and that is down. Demand for PCMO declined at a compound annual rate of 2.1 percent from 2000 to 2019. Last year ended with an estimated 265 million gallons less PCMO consumed than in 2000. Longer drain intervals are the primary reason why.
While the number of miles driven by passenger cars increased by nearly 14 percent over the past 20 years, oil life monitors, OEM recommendations and other factors continue to extend drain intervals. By analysis of PCMO demand, miles driven, fuel consumption and other variables, these data show drain intervals moved from an average of 3,100 miles between oil changes in 2000 to 5,300 in 2019.
Based on the PCMO trend line over that period, which shows a fairly linear regression, demand for PCMO in five years would reach only 485 million gallons, a loss of 10 percent. The rate of decline beyond the five-year horizon, however, is expected to ramp up due to the increased presence of full electric vehicles.
While this may sound like an ominous outlook for PCMO and isnt particularly upbeat for lubricant demand overall, the higher prices of synthetics and other high-performance lubricants are offsetting volume losses in some segments, sectors and product categories. This isnt surprising considering that demand is relatively price inelastic since most machinery cannot operate without it, and there are no substitutes.
With OEMs increasingly specifying use of synthetics and higher-performing additive systems and extended drains favoring the same, together with the current splitting of OEM specifications and increased scrutiny of motor oil quality, the business is changing as it moves from maturity to decline. Some of these changes are already hinting that lubricants could inch away from the low-priced space of commodities into the higher-priced market of specialty products.
But before and if that occurs, the lubricants business will remain highly competitive and the number of suppliers will undoubtedly continue to shrink as supply and demand forces bring the market back to equilibrium.
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