Gleanings from the Industry
The lubricants industry is often described as a people business, built on relationships. But supply shortages and uncertainty are straining many of those. Stories of shouting matches in video calls, of people not picking up the phone because they don’t want to speak to the caller and suspicions of unfavorable treatment abound.
And in the middle is the distributor. Often the solutions provider in more comfortable times, the party that delivers raw materials or finished formulations to the customer is often during the current crisis bound by contracts that prevent the flexibility for which they are often renowned.
Tensions appeared in the week following the first attacks on Iran. Within days, distributors reduced availability or stopped deliveries, leading several blenders to begin the scramble for base oils. “It seemed like refineries closed their order books and focused on supporting major or related customers,” said one source based in Europe. In at least one case, delivery of a base oil that didn’t originate in the Middle East was cancelled without explanation.
Of course, major lubricant manufacturing customers have contracts with the large base oils and additives suppliers, which then constrain the distributor to honor those commitments. Sometimes this is misunderstood by other customers or would-be customers and is characterized as favoritism. The distributor is caught in the middle.
In some cases, commercial confidentiality means that the distributor cannot tell the customer why they could not fulfill the order.
Sudden stock-outs have also affected deliveries of finished lubricants. A national finished lube distributor for one of the top-ten global brands was told at short notice that certain grades would be unavailable for the foreseeable future. The feeling is that the global brand is prioritizing contracted factory fill business ahead of branded products in the aftermarket.
Emotions Running High
Prioritizing business-to-business over business-to-consumer must have been a very difficult decision for some at the lubricants marketer, for whom brand equity ranks very high. No surprise that there have been reports of shouting matches in internal meetings.
Lack of explanation in a pressure situation often leads to suspicion. One source recounted having an order cancelled on short notice and shortly thereafter being informed of new availability that was priced almost 50% higher. The source told this reporter they would be looking at new suppliers as soon as they feel confident that they have a choice.
Another source described how they screen incoming calls. “There are some people I don’t answer the phone to nowadays.”
Customer-facing staff of finished lubricant manufacturers are taking a greater interest in the availability of raw materials and the extent to which raw materials carry finished lube approvals. If replacement materials don’t carry the same approvals, finished product marketers can’t claim to meet the same specifications.
Those in procurement, supply chain, performance testing and manufacturing are feeling pressure. “One thing you used to be able to count on was that everyone treated everyone with respect. That’s no longer the case,” said another source.
There is a suspicion that some of the tensions arise because in some Western countries diesel, gasoline and aviation kerosene are all available, albeit at a higher price. Some participants appear unable to understand that some of the diesel and kerosene in the market is there at the expense of base oil.
Working Together
Further east, crude oil and fuel shortages are apparent, so it has possibly been easier to make the connection. In July, after a months-long hiatus, Houthi militants in Yemen resumed attacks on ships passing through the southeastern part of the Red Sea, in particular those they associated with Saudi Arabia, and this was expected to further constrain crude and fuel supply for countries and companies in the East have become greater.
Earlier in the summer, base oil buyers had complained about base oil prices not decreasing in line with crude and gas oil values. Normally base oils track closely with those commodities, which are inputs for base oil production. (Gas oil is a direct feedstock.) But base oils prices did not retreat as crude and gas oil did in June and July — at least not nearly to the same proportion — leading to significantly higher base oil margins.
“The disconnection between gas oil pricing and base oils has been difficult for end users to understand,” according to Greg Croaker of QLSA, a base oils and additives distributor based in Melbourne, Australia.
Availability is a big issue, but “one of the biggest challenges facing suppliers, manufacturers and end users has been the additional financing costs associated with the near doubling of base oil prices,” said Croaker. The Australian Lubricant Association, which represents manufacturers, marketers and distributors in the lubricant and grease supply chain, has lobbied for base oils to be given the same government support as fuels. In late March the Australian parliament voted to allow public funds to be used to support fuel and fertilizer purchases on the global market.
According to Croaker “The ALA and the Australian Industry Group [a manufacturing and industrial lobby group] have been working with the Australian federal government to raise awareness of the issue of supporting base oil supply into Australia.” They want the Australian government to regard base oils as a sovereign risk.
On that initiative, everyone is working together. The lubricants industry has been vocal in identifying that end users — particularly in Australia’s very important mining industry — could face stock-outs of lubricants and greases. By being up front about this and lobbying at the highest levels, there is hope that some of the emotion has been dialled down in customer-supplier relationships.
In Japan, the government has been more interventionist. In March, the Ministry of Economy, Trade and Industry asked manufacturers and wholesalers to keep purchases and supply at roughly the same level as the same month one year earlier. This was in response to excess orders by some distributors and blenders and was perceived as a calming measure.
Another Scramble?
At the start of March, companies that could scrambled to make cash purchases of base oils from Turkey, Singapore and many countries in the Middle East and South Asia. Initially there were some quite large API Group III packets available in India, for example.
July saw another development that could again tighten spot availability of base oils. According to Lubes’n’Greases columnist Ray Masson of Pumacrown, Ukrainian strikes on Russian refineries continue to “disrupt or destroy production across the slate [of petroleum products], and there are shortages [in Russia] of both base oils and fuels.” The shortfall of diesel in Russia was being filled by Eastern refiners cracking more deeply and reducing Group I and Group II output.
So, what is the way forward? Perhaps to paraphrase former British Prime Minister Tony Blair “communication, communication, communication.” Or the Canned Heat song of 1973: “Let’s Work Together.”
Trevor Gauntlett has more than 25 years’ experience in blue chip chemicals and oil companies, including 18 years as the technical expert on Shell’s Lubricants Additives procurement team. He can be contacted at trevor@gauntlettconsulting.co.uk