Little Falls, NJ — Like many other segments of the U.S. economy, the lubricants industry experienced another disappointing year in 2003. Sales fell by nearly 5% from the prior year, according to preliminary estimates from the upcoming edition of Opportunities In Lubricants North America, Kline & Company’s annual market analysis.
Factored into this moderate decline, however, is a drastic decrease in volume sales for industrial uses, estimated by Kline at more than 10%. Such an extreme drop within a short time frame raises the question of whether it is a symptom of cyclical economic currents or an indication of a deeper-rooted trend.
“While lube sales weren’t stellar in the automotive segment last year either, the massive volume decline for industrial uses is alarming, and it prompted us to examine what was really going on there,” says Vineet Deshpande, a senior consultant in Kline’s Petroleum & Energy Practice.
At first glance, it appears that the major oil marketers, including Shell, ExxonMobil, ChevronTexaco, and ConocoPhillips, experienced a substantial drop in branded sales of industrial lubricants and consequently dragged the entire market down. According to Deshpande, however, further investigation revealed that the decline in volumes sold by these major companies was much greater than the decline in the market segment as a whole.
This suggests that imports and volumes sold by independent lubricant manufacturers grew in some areas and offset part of the overall decline. Is this an indication that a fundamental shift in industrial lubricant supply is on the horizon?
“We could be seeing a structural change in the industrial segment like we saw in the U.S. naphthenics business,” says Milind Phadke, a senior consultant for Kline. “The pricing power of the oil majors is diminishing, and margins are being squeezed to such an extent that the segment is beginning to look increasingly unattractive for large companies with high overheads and SG&A expenditures.”
If the major oil marketers are focusing even more on commercial and consumer motor oil and less on industrial oils and fluids, it shouldn’t be difficult to see why, Phadke says.
“With PCMO and HDMO, the major marketers have fewer product variations to deal with and can leverage their size to create production efficiencies. And they’re also able to earn a premium on price through branding.”
In contrast, the industrial segment requires a much greater variation in product types, offers no scale advantages, and presents little benefit from branding. Major marketers must also compete for share with smaller niche players, and given the current pricing pressures, the oil giants may be inclined to just let them have most of the commoditized industrial oil and fluid market, including hydraulic oils, industrial engine oils and process oils.
“Over the past year, basestock prices have gone up by about 40 cents a gallon, but PCMO and HDMO prices have not gone up nearly as much, so the price spread has fallen by 30 cents a gallon,” says Phadke. “At the same time, prices for some industrial lubes have dropped, so the price spread there has fallen by 50 cents a gallon. If you do the math, it’s pretty clear where the majors’ interest is going to lie.”
For information on how to subscribe to Opportunities in Lubricants North America 2002-2004, visit www.klinegroup.com/y59.htm or contact Geeta Agashe at 973-435-3484. Kline & Company Inc. is an international business consulting firm that offers a broad range of services to the petroleum and energy industry.