A Look Back at 2022 and Ahead to 2023
Although lubricant manufacturers and distributors in 2022 had to navigate through less chaos than seen in 2020 and 2021 during the pandemic, business was still far from settled. Many of the supply chain challenges and cost pressures seen during the pandemic rolled forward into 2022, and there were some new and unwelcomed challenges to overcome as well. For many, the most demanding was the severe shortage of lubricant additives. The following is a look back at the business in 2022 and a peek into what may lie ahead.
Setting the stage
Before discussing the lubricants business of 2022, it’s important to understand the challenges the industry had to endure in 2021, and how those events set the stage for the year that followed.
With the aftershock of an abysmal year at the start of the pandemic in 2020, the lubricants industry had to navigate through a barrage of extraordinary challenges in 2021. The year started with a historic ice storm in the Gulf that shut down many facilities and caused extended downtime for Lubrizol’s Deere Park plant in Texas, the largest additive plant in the world. This weather-related event sparked the start of very tight supply of PCMO and HDEO additives, snug-to-tight supply of base oil, and steep increases in prices. It also set off a cascading number of events that resulted in force majeures, deep allocations of finished lubricants, widespread supply line interruptions, and long delays in product shipments.
These events compromised lubricant production so severely that some blenders, including majors, were unable to provide enough product to meet demand for certain types and grades of motor oils. And for those that could source raw materials and finished product, there were exceedingly long delays in shipments.
In an effort to reduce delays, suppliers found it necessary to moved more product by truck rather than rail. This exacerbated an industry already struggling with a significant shortage of drivers, and this too pushed prices higher. Further, due to these and other issues, some blenders had to make the difficult choice of either shipping finished product to their customers or utilize limited transportation resources to bring in raw materials to make new products.
Adding to the angst of the extraordinarily tight lubricant supply, Lubrizol’s Chemtool grease plant was destroyed by a devesting fire in June of 2021.
In addition to the very tight supply of additives, base oil producers also had their share of challenges. They had to ramp up production after dialing it down to adjust for the sharp decline in demand following the first year of the pandemic. While base oil supply was tight for most of the first half of 2021, producers worked to keep up with rebounding demand by increasing run rates in the second half, and spot prices softened by year’s end. But improved run rates were not the only reason base oil supply and demand were nearly in balance. Demand was also reduced due to the shortage of additives which curtailed finished lubricant production. But even with overall improved supply of base oils, the industry ended 2021 with a tight supply of 4 cSt Group III and bright stock.
Moving on to 2022
With that as a starting point for 2022, it was clear that the industry remained in a very challenging environment and there would likely be some tough sledding ahead.
Although many of the challenges from 2021 painfully spilled over into 2022, the first month of the year was relatively uneventful. Change did, however, come in February. Base oil prices moved up by roughly 30 cpg and additive manufacturers announced prices would increase by up to 15% during roughly the same period. In response, most lubricant manufacturers announced in February that there would be a price increase of up to 15% taking effect in March. While price increases are fairly typical at the start of the year, what happened next was unfathomable and felt globally.
On February 24th, Russia invaded Ukraine. This event further complicated the already stressed global supply chain of energy, food and many other goods, including base oils. In addition, it significantly increased the level of uncertainty, with many fearing the start of a World War.
Both WTI and Brent prices rose above $100 per barrel after Russia’s invasion into Ukraine and freight costs also moved up significantly. This sparked a second round of base oil price increases. And to the consternation of many blenders and distributors, the lubricant price increases they were implementing in March were immediately followed by a second round of base oil price increases. These increases took effect on or about March 1st and moved the price of base oils up by 50 cpg.
Adding even more cost pressure and pricing challenges to blenders, additive manufacturers announced they would push through another increase of up to 15%, effective in the April/May time frame. In response to these actions, most blenders announced in March that they were implementing a second finished lubricant price increase of up to 15%, set to take effect in April.
With the price of crude continuing to climb and base oil supply tight, two more base oil increases went into effect in April and May. These increases pressured blenders to announce in May that they would be pushing through a third finished lubricant price increase. This increase went into effect in June and ranged from 8 to 15%.
Then in June a fifth increase in base oil prices occurred. This moved base oil prices up by close to 30 cpg and gave rise to a fourth round of finished lubricant price increases ranging from 12 to 15%, effective July and early August.
At roughly the same time blenders were implementing their fourth price increase of 2022, another shoe dropped when additive suppliers announced a third round of price increases. Set to take effect in July, this adjustment moved the price of lubricant additives up by about 12% and gave rise to some lubricant suppliers announcing a fifth lubricant price increases for the year.
While this looked like the beginning of a broad fifth round of lubricant price increases, a sudden drop in base oil prices occurring in September stalled much of the upward movement in lubricant prices for the remainder of the year.
ExxonMobil, for example, announced a price increase on August 15th set to take effect on September 15th. Shortly following that announcement, however, the company notified marketers that based on a review of market conditions and base oil prices it would only be implementing select adjustments in September. Marketers later learned that the increases were limited primarily to synthetics (e.g., Mobil1, aviation lubricants), and greases.
Shell also announced a fifth increase on August 31. While this increase was set to take effect on October 1, 2022, marketers were later advised that the adjustment would not impact Shell’s distributor prices at that time.
In addition to these developments, a number of other lubricant blenders pulled back on announced or planned increases, due in part to the drop in base oil prices.
Importantly, there were also other factors driving increases in the price of finished lubricants in 2022. In addition to escalating base oil and additive costs, blenders were adjusting to higher costs in freight, labor, and packaging. While some of the cost pressures (e.g., freight rates) eased in 4Q, others continued to escalate. When taken together, freight, packaging, and blending costs can account for 10 to 40% of the cost of a lubricant.
Another important factor to consider in the lubricant price increase landscape, and what for many was the most challenging part of the year was the continuing, and very significant shortfall in lubricant additive supply.
Lubrizol’s force majeure remained in place until mid-September, and even when lifted blenders were advised that it did not mean Lubrizol had unconstrained production capacity and output. Some anti-wear and extreme pressure additives remained under Force Majeure, and sales controls remained in place to help manage Lubrizol’s limited supply.
Further compounding the severe additive shortage, record setting rain in July caused catastrophic flooding in the Midwest and this resulted in Afton Chemical shuttering it’s Sauget, Illinois lubricant additive plant. Afton advised customers that, effective July 26, 2022 it declared the outage a force majeure event and as such, was limiting orders for engine oil additive packages and some off-road lubricant additives manufactured in North America. Although Afton lifted the force majeure on September 8, the company advised blenders that supply may continue to be constrained by raw material availability, network logistics and ongoing planned plant maintenance. As a result, sales controls would remain in place for engine oil additive packages.
With Lubrizol’s additive production running below capacity and inventories low, and Afton shutting down Sauget for over a month due to the flood, many blenders struggled to source enough additive to meet rebounding lubricant demand for most of 2022. Shortages were particularly evident with heavy duty engine oils and some products from the major brands where out of stock. With respect to passenger motor oils, products with GM dexos1 credentials were said to be especially tight in supply, along with way oil, some types of hydraulic fluids, synthetic gear oil, and EP grease.
While most blenders were feeling the pain of shortages in the PCMO and HDEO space, stockouts were reportedly most notable among such market leaders as Shell and ExxonMobil. And according to lubricant marketers, some majors that were out of stock were advising their marketers to retain business by substituting with private label products meeting the same API and OEM credentials as the major’s brand.
Interestingly, although the severe additive shortage was felt by both major oil companies and independent lubricant manufacturers, marketers say the later fared better than some majors in their ability to serve the market with certain types and grades of PCMO and HDEO. One reason for this is believed to be greater flexibility and agility on the part of independent lubricant manufactures to work with a wider number of additive suppliers and formulations.
As the fourth quarter rolled along, supply chains improved and prices stabilized and even started to ease. Demand also unexpectedly slumped in the fourth quarter in spite of inventories being low. It is likely that distributors and their customers were being cautious about building inventory while prices remained high and in light of uncertainties about the economy.
When taken together, for much of 2022 these and other events resulted in most lubricant blenders and distributors scrambling to source product, pivoting to manage logistics and costs, dealing with labor shortages, implementing six lubricant price increases, and explaining and apologizing for delayed shipments and stockouts. And the year ended with many scratching their heads wondering what’s next.
So, what will 2023 bring to the industry?
Cautiously assuming there will be no unexpected calamities in 2023, lubricant demand is expected to be soft and therefore prices should ease during the year. Some blenders, however, expect competition to significantly intensify as majors aggressively compete to recover market share lost to private label lubricants in 2021/22.
In some respects, such competition may prove to be a defining year for private label. Many marketers and their customers were forced to make the switch to private label lubricants over the past two years, and most say they had few if any issues doing so. Now that they switched to what is often more competitively priced, higher margin products, will distributors and their customers return to the brands they left? And if so, at what cost and price will it take?
While the majors are believed to have a competitive edge in the industrial lubricant sector, their ability to wrestle market share back from private label in the highly competitive automotive sector in 2023 will be very telling. But beyond their ability to do so, many question their willingness to do so when it means competing with private label primarily on price.
According to some marketers, several majors are increasingly willing to walk away from such price buyers rather than see their wallets get shredded by engaging in price wars with private label. This is particularly the case when the basic hydrocarbon molecules consumed in the finished lubricants sold by a major can return greater revenue and profit if sold into other product and markets (e.g., base oils). And with today’s cutting-edge digital technologies, majors and a growing number of lubricant distributors have the ability to determine a walkaway price based on real-time analytics comparing revenue, profit, and strategic value for every product and customer on its books.
Regardless of how this plays out, you can be sure JobbersWorld will be there to cover lubricant related events as they happen in 2023. In the meantime, we wish all our readers a Happy and Healthy New Year.