Will U.S. lubricants sales volumes finally return to growth?
By Aaron Stone
Lubricant sales in the United States have been “through the wringer” over the past decade. Much of this turmoil can be attributed to the global economic downturn. If you’re a lubricant manufacturer, importer or distributor, relying heavily on lubricant sales volumes, you could be forgiven for believing the declines were never going to subside.
Presenting at the Independent Lubricant Manufacturers’ Association’s (ILMA) annual meeting last October, Annie Jarquin, director of Energy at Kline, estimated current demand for finished lubricants in the U.S. at 7.79 million tonnes. While this volume still firmly positions the U.S. as the leading global consumer of finished lubricant products (slightly ahead of China at 7.35 million tonnes), the statistics serve to underline the severity of the market downturn, with demand falling from a staggering 9.5 million tonnes in 2006.
The question every member of the lubricant supply chain wants answered is undoubtedly if, or when, will the U.S. lubricants industry finally return to growth?
In promising news, an April 2016 report from Freedonia Group forecasts a rebound effect, suggesting “U.S. demand for lubricants will rise slowly through 2020,” attributable to advances in industrial applications, offsetting ongoing declines in automobile lubricant demand. Even a modest increase represents a reversal in fortunes from the outright drop of 2006 onwards.
Jarquin, and Kline, on the other hand predict that demand in the broader North American region (of which the United States is the primary contributor) is likely to remain stable over the next 10 years. While there is perhaps not a clear picture of whether we should expect a return to volume growth, there may be some comfort that experts are not projecting further declines.
The industrial segment accounts for 48% of total volume with an annual demand of 3.7 million tonnes. Consumer (29%) and commercial (24%) provide the balance. But while industrial leads on volume, engine oils is the spearhead when it comes to value. The 1.8 million tonnes used in the consumer automotive segment equates to USD10.4 billion.
Stabilisation of the U.S. lubricants industry can be attributed to a number of market forces. First and foremost, an improving economic climate is accelerating manufacturing activity, with efficiency improvements being offset by higher output. This upswing is supported by low natural gas prices, a critical input for the petrochemical and refining industry and one that provides U.S. companies a cost advantage over some of its overseas competitors.
Strength in lubricant consuming industries such as construction, oil and gas, etc., is also a determinant. Advances in manufacturing processes necessitate lubricants that deliver operating cost optimisation but are also capable in severe operating environments due to improved antioxidant (AO), anti-wear (AW) and extreme pressure (EP) properties.
The handbrake on industrial growth is losses in the light vehicle market. Automotive lubricant demand is in long-term decline globally, particularly in mature markets, as improved efficiencies, longer oil change intervals, more discerning customers, and a focus on the use of premium quality products (such as synthetics) stifle the chance of significant overall volume increases.
Even in the absence of definitive growth, it’s not all doom and gloom for downstream lubricants suppliers. Improvements in vehicle technology and lubricant formulations continue to accelerate through the pursuit of better fuel efficiency. The United States light vehicle market continues to adopt high quality, lower viscosity, multigrade oils and new manufacturing and industry specifications are proving to be influential. This shift towards premium products provides an average price or value benefit that substitutes static demand growth.
In somewhat of a “double whammy” for downstream lubricant businesses, an oversupply of base oils, alongside low base oil plant operating rates, has depressed base oil margins. Together with low crude oil prices, this means lubricant businesses should continue to enjoy “above average” profitability in the near term, despite changing consumption patterns.
Jarquin suggests that distributor strategy will continue to play an integral role in the marketing efforts of companies seeking to promote their finished products. Although Jarquin admits to some extent this can be “unpredictable,” with market consolidation and acquisition out of their direct control.
Petrochoice, Reladyne and Brenntag are major players in U.S. lubricant distribution and have grown appreciably to control a significant proportion of distribution rights. Many U.S. operators have avoided merger and acquisition movements and continue to operate as independent regional businesses…. for how long it remains to be seen.
All distributors employ a multi-brand strategy in their respective sales territories. While providing customer choice and products that are fit for purpose, influencing decision makers on branded offerings and ensuring frontline sales acquire sufficient expertise across a broad range of brands can prove challenging.
Advancements in technology will continue to be a pivotal market dynamic. It’s no secret original equipment manufacturers (OEMs) are now playing a more significant role in the lubricant supply chain – moving to global standards with increasing technical demand for high quality products in automotive applications. An abundance of high performance base stocks are supporting this rate of change.
However, other non-lubricant technology advancements are also worthy of discussion. What impact will “digital” have on the evolution of the lubricant value chain? The rapid rise of digital technologies provides both an opportunity and challenge. How can lubricant businesses use digital effectively to build relationships, communicate with and influence key decision makers, as well as drive sales and marketing efforts.
Aggressive electric vehicle sales have the potential to deliver a wake up call to the lubricants industry; independent energy advisor Andreas de Vries suggests that major oil companies “greatly underestimate the impact electric vehicles will have on their market.”
Electric cars are the future of the automotive industry and an absence of an internal combustion engine means there is little to lubricate. This creates substantial uncertainty for the automotive lubricants industry in the medium to long term.