Adding to the angst of soft demand, the cost to manufacture and distribute lubricants increased during the first half of 2024. One example is seen in the price of base oils moving up twice over the past six months. The first came in late February and into March with price increases ranging from 15 to 20 cpg. A second occurred shortly after in April and this one moved base oil prices up by 30 to 40cpg. Both increases primarily impacted Group II/II+. In addition to base oil, additive suppliers pushed through selective increases ranging from 8 to 10%. This occurred roughly a month following the base oil movements. Blenders also reported increase in the cost of in- and outbound freight.

While hikes in the cost of base oil and additives historically drive industrywide increases in the price of finished lubricants, it was different this time around. Only two majors and a relatively small number of independent lubricant manufacturers announced finished lubricant price increases in response to the base oil and additive adjustments. Many others held back due to the unfavorable market conditions of soft demand and the intensity of competition that comes with it. And even among the marketers that received increase notifications from their lubricant suppliers, they struggled to pass-through the increases on to their customers. Some say they elected to absorb some or all of the increases rather than risk the loss of even more volume by pushing increasingly brand agnostic buyers to switch to lower priced alternatives.

So, while there was a smattering of finished lubricant price increases announced in April ranging from 12 to 15%, market pushback and competitive pressure resulted in lubricant prices eroding by close to 5% since the start of the year. The degree of the price slippage, however, varies by product segment, sector, and brand. Additionally, it is important to recognize that some large national accounts purchase lubricant on formulaic pricing, and as such, increases in the cost of base oils triggered finished lubricant price increases that stuck. For this reason and others, there are also significant difference seen in the degree of price erosion by company.

But even with these differences, most marketers report that finished lubricant prices have dropped since the start of the year. And with high cost and lower prices, their profit margins were compressed.

Looking ahead at the balance of the year

Prognosticating about the next six months in lubricant demand is fraught with uncertainty. The uncertainty is due to mixed signals coming from US economic data, wide differences in public forecasts concerning growth in demand for crude oil, the tenacity of inflation, potential for a recession, market volatility leading up to the presidential election, and other issues. But in the absence of any unexpected shocks (not necessarily a safe bet considering what we have been through over the last 4 years), the outlook for the US lubricants business over the remainder of the year is cautiously optimistic. This is not to say that demand will reverse course and climb back to where it was prior to Covid. The chances of this occurring are unlikely considering demand in the consumer automotive and, to a lesser degree, in the commercial automotive sectors is on a downward trajectory due to the continuing quest to extend drain intervals. But, while its unlikely there will be any sustained improvement in demand volume, it’s also unlikely that margins will remain at their current levels. And for margins to improve, it’s likely there will be lubricant price increases seen in the balance of the year. In addition, lubricant marketers will be working even harder to negotiate and renegotiate contracts, secure favorable spot market deals on base oils, streamline efficiencies, and take other actions to reduce costs.