Challenging and Uncertain Times in the Lubricants Business
Ensuring the health of employees and maintaining business continuity during the COVID-19 pandemic, and managing profitability when costs are going up and base oil prices just went down.
While much of the news coverage around the economic impact of Coronavirus (COVID-19) centers on the stock market and the COVID-19 Stimulus Bill in the Senate, these unprecedented times are clearly having a profound impact on all businesses. In fact, even for JobbersWorld, we are now working from home offices in response to the Governor of New Jersey’s Executive Order directing all non-essential workers of the State’s nearly 9-million residents to stay at home until further notice. Although disruptive to our operation, its impact on JW’s business pales in comparison to the economic challenges many businesses face due to states directing the closure of non-essential businesses, shelter-in-place orders, orders instructing businesses to have their employees work from home, travel restrictions, and other actions to protect the public from the virus and flatten the curve of infections. And needless to say, all this is happening when everyone is concerned about their own health and that of their loved ones.
So, how is COVID-19 impacting the lubricants business and how are blenders and marketers dealing with the challenges and uncertainty of these times?
First and foremost, the lubricant blenders and marketers JobbersWorld (JW) recently surveyed say they have and continue to implement and refine measures to help ensure the safety of their employees and their families, visitors, customers, business partners, and the communities where they operate. Such measures include consistently and continuously sanitizing their facilities, servicing customers from remote/home offices, reducing on-site staff to essential personnel, minimizing or eliminating in-person meetings, providing drivers with personal protection equipment, and importantly, following CDC, WHO and state and local mandates and guidelines.
In addition, they are working hard to ensure the continuity of their operations, service and support, and minimize any disruptions in supply and deliveries of products to customers. In some cases, this means paying hourly employees bonuses to come to work, hiring temporary staffing to fill in for those who can not make it to work due to illness or need to care for their children due to school closures, and for those who are in self-quarantine, or caring for the ill.
While lubricant blenders and marketers JW surveyed say they are taking action to ensure the safety of their employees and others, and maintain the continuity of their business in these challenging times, they add that it has resulted in substantially higher operating costs. And such costs require expenditure of unbudgeted funds.
But, while operating costs are increasing due to COVID-19, today, Motiva announced a 60cpg decrease in the price of Group II base oil. This price adjustment adds another level of complexity to the challenge of managing a lubricants business in today’s environment.
Where a drop in the price of base oil of the magnitude seen by Motiva today would typically drive finished lubricant prices down, some caution that although lubricant prices will most likely decrease in response to Motiva’s adjustment, it’s unlikely prices will decrease at the same cost-price ratio seen in the past. One reason why, is the higher operating costs associated with COVID-19. In addition, as is typically the case in the spring, many lubricant suppliers have increased inventory of finished goods to meet what would normally be growing demand at this time of the year. But rather than growing, demand has declined over the past few weeks as a result of the virus and inventories are higher than planned.
Understanding such inventory is valued at higher cost, those with such inventories face the real risk of substantially, if not dangerously, reducing overall margins by overreacting to the announced decrease in base oil price. Of particular concern on the minds of some is how such an overreaction, or miscalculation could impact their business in the event additional increases in operating costs and/or decreases in demand are seen as a result of the COVID-19 pandemic. For these reasons, they say that any adjustments in the price of lubricants in response to decreases in base oil prices will be made with considerable caution and consideration given to the fluidity of COVID-19 and market conditions.
Without question, the lubricants business is facing challenging and uncertain times. But as difficult as these times are for those in the lubricants business, it’s important to note that all those in the business JobbersWorld spoke with say their thoughts and prayers go out to those affected by the virus and they are committed to doing what’s right to protect their employees, customers, and business partners, and to do their part in preventing transmission of the Coronavirus.
JobbersWorld shares these sentiments. Please take care of yourselves and each other.