As most in the industry are now aware, 2020 ended and 2021 began with nearly all major and independent lubricant manufacturers announcing price increases. Most of the increases were in the range of 10 to 15% with effective dates in the second half of January.
The need for the adjustments were primarily attributed to 20 to 30 cents per gallon (cpg) base oil price hikes occurring in December 2020, as well as increases in the cost of nearly all other raw materials used in the blending and packaging of lubricants. These include plastic resin, corrugated, as well as higher transportation and manufacturing costs. In addition, on December 1, 2020 Afton Chemical announced it would adjust the price of its lubricant and fuel additives by up to 8%, or more. These adjustments take effect on January 20, 2021. And on January 4, 2021, Infineum USA announced it will increase lubricant additive prices by 6 to 9%, effective January 25, 2021.
Importantly, increases in base oil, additives, packaging and other costs do not impact all lubricants in the same way. As an example, where base oil increases can have a significant impact on the cost of goods to blend R&O hydraulic oils, increases in the price of additives have a relatively small impact on such lubricant due to its low additive treat rates. Conversely, HDEO, PCMO, and some gear oils shoulder a high impact from additive price increases due to comparatively higher additive treat rates. In addition, these product types typically require use of higher priced base oils. These differences, in part, explain why price increase announcements are often expressed as a range and commonly include language stating that the increases can vary by product type and for some, exceed the range.
The current cost and pricing dynamic are reminiscent of the second quarter of 2019. During that time, lubricant marketers had already announced, and some were in the process of implementing the first price increases for the year in response to higher base oil prices. While doing so, there was another round of base oil increases only weeks after the previous. The challenge was to then either move forward with the announced lubricant price increase and follow-up with a second shortly after; move forward with the first increase and eat the higher costs of the second base oil increase for a time, or rescind/revise the first to make adjustments for the second hike in base oil prices. Most made the decision to rescind/revise the first lubricant price increase making adjustments for the second round of base oil increases.
Today we are looking at what is shaping up to be a similar situation. While nearly all blenders and marketers announced lubricant price increases in response to base oil increases in December, lubricant manufacturers and marketers are now looking down the barrel of another significant increase in the price of base oil. Early in 2021, ExxonMobil announced a base oil increase of 40cpg effective January 20, and Petro-Canada followed with an announcement on January 15 that it too will increase its base oil price by 40cpg on January 20. Assuming the base oil increases hold, both blenders and distributors may be going back to their customers with yet another round of finished lubricant price increases while the first was due to be rolled out.
The following chart provides a sense for how the first round of price increases on base oils, additives, and others impacted the cost of goods at the blender level. In addition, the right side of the chart shows the combined impact of the first and second round of base oil price increases announced in January 20201 on the cost of goods to produce a gallon of finished lubricant for an aggregated product slate.
NOTE: The above chart illustrates the net cost increase for base oil and additives used to blend lubricants. In the case of PCMO for example, a 40 cpg increase in the cost of base oil would not translate to a 40cpg increase in the cost of the product since roughly 80% of the PCMO is base oil. Also, an increase in cost of the base oil used as carrier and diluent in an additive package is accounted for in the price increase for the additives. Understandably, a base oil increase has a greater impact as a percentage on hydraulic fluid since it comprises nearly 100% base oil. Importantly, however, the base oil used in hydraulic fluid is typically lower in cost than that used in synthetic motor oil, as an example. With ~0.5% additive treat rates, an increase in the price of additives has significantly less impact on hydraulic fluids. The numbers behind the chart take into account the base oil and additive percentages (affectively the net base oil and additives cost/factoring for treat rates) in most product types (automotive and industrial). And rather than showing the impact of the increases on one product type, the chart illustrates a pooled average impact across a wide slate of automotive and industrial product types.
With that said, a lubricant blender with a high volume of sales in motor oils is hit harder by base oil and additive price increases than a blender with a high volume of sales in hydraulic fluids, and very little in motor oils.
But there is more. In addition to higher finished lubricant prices, lubricant marketers/distributors are also experiencing escalating costs in other areas. These include transportation costs, packaging costs (many repackage bulk into drums and pails), labor, and more. Understandably, these cost too are factored into the price of the distributor’s products and services.
Although 2021 is looking a lot like what blenders and distributors had to manage through in 2019, according to many distributors JobbersWorld speaks with, there is an additional layer of complexity and pain this time around. Because in addition to what could be two price increases in a short period of time, distributors are still in the process of recovering the lost business and price relief extended by some last year in response to intense market pressures caused by Covid-19. This means that in addition to working through two price increases in a short period of time, many are also trying to get price, profitability, and sales back on track from last year.
In the views of many in the supply chain, the base oil price increases currently moving through the chain are coming at one of the most challenging times they have seen. But if anything was learned from the last time we experienced such market dynamics, it’s times like this that underscore the importance of managing costs, pricing, inventory turns, and strengthening partnerships throughout the supply chain and customer base.