The lubricants business got off to an interesting start in 2020, beginning with a rapid hike in crude prices. Although there is nothing particularly remarkable about upward movements in the price of crude, what was noteworthy was the brisk pace at which the increases cascaded through the lubricants value chain-even though the crude increases proved to be a short-lived spike.
To get a sense for the pricing dynamic at the start of the year, consider that in response to escalating tension between the United States and Iran, the price of crude moved from $67.77 a barrel at the end of 2019 to $70.25 by Jan. 6, 2020, up 3.7 percent in only one week. This triggered an increase in the price of base oil. Motiva was the first to announce a 30-cent-per-gallon hike effective Jan. 13. Others soon followed with similar increases and effective dates.
It is often the case that when base oil prices increase significantly, finished lubricant prices also move, and they did. But unlike in the past when there was a little air between base oil increases and letters announcing finished lube increases, the changes in base oil and finished lubes took place in rapid succession.
Total Specialties USA was the first to adjust lube prices with an announcement on Jan. 3, which it later revised from 40 cents per gallon to 8 to 12 percent, effective March 2. Amalie followed with an announcement on Jan. 14 that, effective Feb. 13, prices were going up 32 cents. Announcing on Jan. 16, Chevron was the first major to move, and ExxonMobil and Shell followed with announcements on Jan. 21.
Within 30 days of the start of the year, nearly all finished lubricant manufacturers announced increases in the range of 7 to 15 percent with effective dates ranging from mid-February to early March. But while the letters were going out, the price of crude continued its slide begun at the end of January, with Brent dropping to the low $50s per barrel in early February. This had many wondering if the base oil and finished lubricant price increases would stick.
Including the changes already seen in 2020, there have been 31 times over the past 15 years when lubricant manufacturers have announced price adjustments. Among them were 28 increases and three decreases. The increases ranged from 4 to 16 percent and decreases averaged 7 percent.
Just over 60 percent of the price increases announced over the past 15 years were effective in the first half of the year, evenly distributed in the first and second quarter.
The third quarter is a comparatively quiet time, accounting for only 12 percent of price adjustments. History shows, however, that increases pick up in the fourth quarter, with 25 percent of the price changes in this period.
Nearly all of the increases in the past 15 years correlate to significant movements in crude prices.
If we added up the increases and decreases seen over the past 15 years, the price of lubricants would have moved up close to $12 a gallon, or 190 percent, from 2005 to 2020. This clearly did not happen. Instead, while a gallon of competitively priced conventional passenger car motor oil was in the area of $4.05 to $6.75 per gallon for installers in 2005, todays prices are only about 15 to 20 percent higher.
So, past price increases slipped away through informal, unannounced decreases in prices driven by competitive pressure. But there are other factors at play that could make this time around a bit different.
One such factor is the recently announced increase in General Motors Dexos licensing fees. With Dexos now considered a decisive quality claim, suppliers have to pay more to play in the automotive sector. And its all but certain these costs will be passed along from manufacturers to marketers through to installers and consumers. So, even though the recent price increases could slip, the higher licensing fees put a new stop-loss on how much ground can be lost.
Increases in minimum wages, higher transportation and packaging costs and other inputs are also a reality that could make the recent price hikes stickier than in the past.
Another important influencer is the upcoming move from API SN to SP, with May 1 set as the first use date for API SP and ILSAC GF-6. Although likely still linked to the ups and downs in base oil prices, the move to API SP could drive PCMO costs up by moving some percentage of the base oils used to a higher quality level. Similarly, the formulation costs to develop SP and bring it to market will have to be recovered. In addition, costs will be incurred for labeling, packaging, marketing and other areas as the transition to SP moves forward.
With these and other factors running in the background, where there may be some slippage in the increases in 2020, pricing could prove to be more sure-footed than in the past.
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