Need to Know
Having made it through a global pandemic, lockdowns, unprecedented interruptions in supply lines, hurricanes, floods, fires, skyrocketing increases in costs, labor shortages and a myriad of other challenges, one would hope for some return to normalcy in the lubricants business. But from what we have seen over the past year in terms of lubricant demand and pricing, that’s certainly not the case.
Although lubricant demand was on the rebound as the economy climbed out of the pandemic in 2021, it started to nosedive in the second half of 2022. The retreat was due to several factors. These included cautionary spending in response to inflationary pressure driving the price of lubricants to unseen highs. This came by way of eight price increases in 2021 and another four in 2022. Fear of a recession, the continuing push to extend drain intervals, growth in EVs, less driving due to high gas prices and remote officing, and other factors also suppressed demand.
In addition to these factors, lubricant consumption was hobbled by exceedingly tight supply of lubricant additives. Beyond deep allocations, some majors were unable to get enough additive to blend mainline products. As a result, stockouts were seen at the wholesale and retail levels for several brand-leading PCMO and HDEO products. Adding to this, some majors were advising and assisting customers to stretch drain intervals to get through the shortages.
When taken together, these and other events resulted in a significant decline in demand for lubricants in the latter part of 2022 and into 2023. While some were hit harder than others, marketers say demand in 2022 dropped roughly 10% compared to 2021, and year-over-year sales in the first quarter of 2023 were down by roughly 5%.
With demand for finished lubricants (primarily automotive) tumbling in the latter part of 2022, base oil supply was long. In response, producers announced a 40-cpg decrease in posted prices in the last quarter of 2022. Although a drop in base oil prices typically provokes a drop in finished lubricant prices, prices were less responsive to the September 2022 base oil adjustments than expected. This is because the decrease came on the heels of a third round of additive price increases in 2022, for which many lubricant manufacturers had not yet made adjustments. So the net of base oil and additive price movements was nearly a wash. But that was not the case when the price of base oil dropped again in 2023.
In response to lubricant demand, and therefore base oil demand, remaining in doldrums in the first quarter of 2023 and other factors, base oil producers dropped the posted price of Group I and II by 30-40 cpg, Group III by 25 cpg and bright stock by 20 cpg in March and April. While these moves clearly put downward pressure on the price of lubricants, the price slide was already underway. In fact, although the cost of base oil dropped twice, many lubricant marketers say they dropped finished lubricant prices three to four times over the past six months. The adjustments were a function of both the lower price of base oil and the intensity of competition heating up as marketers slugged it out for a piece of a shrinking pie. And the competition included some majors discounting their second-tier brands in an effort to claw back market share lost to private label during the additive shortages.
So while there have only been two officially announced decreases in the price of finished lubricants in the first quarter of 2023, with the exception of grease, the price of lubricants slid roughly 10%-20% over the past six months.
That’s in large part how we got to where we are today, and it’s clearly far from a return to normalcy. The market is now in a place where lubricant demand and prices are down. Because of this, the gains seen in revenue and profits due to the runup in prices in 2021 and 2022 will be extraordinarily challenging to sustain in 2023.
Although some believe lubricant demand and prices are starting to plateau, the big question on the minds of many now is, will demand return to “normal” and if so, when?
Based on the opinions of some of the leading marketers, while demand will return to its pre-pandemic trajectory, the big question is, when will the turnaround occur? They say that the answer to this is, unfortunately, extraordinarily hard to predict due to uncertainties, particularly as they relate to the economy and consumer confidence.
Although there is now adequate supply of lubricant additives and the lockdowns of COVID are in the past, marketers believe consumers and businesses are holding back on expenses as a precautionary measure due to uncertainty about the trajectory of inflation and the possibility of stagflation or a recession in 2023. Interestingly, while the economy is a large part of the uncertainty, they say domestic politics, policies and social unrest as well as geopolitical events, energy prices, tight labor markets and high labor costs, interest rates, cash flow, bank failures, immigrations, and a myriad of other issues are inextricably linked to the uncertainty and add to the anxiety suppressing demand.
Even with the uncertainties, the one thing marketers say you can be sure of is that there will be some winners and losers that come out of these challenging times. Among the winners will be those that have—and will continue to maintain—a positive attitude within their organizations and when interacting with customers. Rather than lamenting about market conditions and getting pummeled by constant changes and disruptive and unpredictable events, they will continuously make adjustment for the winds and waves as they navigate through the rough seas to reach growth opportunities.
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