For many people, motor oil is the first thing that comes to mind when you tell them you are in the lubricants business, and rightfully so. Motor oils have high visibility in the market, since nearly everyone of driving age reaches into their pockets to purchase it. Similarly, most commercial enterprises cant move without it. And to ensure that their brands get the attention of this crowd, companies spend millions annually on creative and compelling engine oil ads that often feature notable celebrities in music, sports and racing.
Demand numbers, rather than advertising spend, also explain why motor oils have such high visibility. When passenger car and heavy-duty diesel engine oils are lumped together, they account for an estimated 40 percent of the 2.4 billion gallons of lubricants consumed in the United States in 2017. But there is a lot more to the lubricants business than just motor oils.
The biggest slice of the U.S. lubricants pie is the industrial market, accounting for 48 percent of total demand. The industrial segment is complex and driven by a wide range of variables, most importantly the economy. Todays buoyant economy is erasing some of the punishing volume loss seen during the global economic downturn that began in 2007. Assuming the economy remains on its current trajectory, overall demand for industrial lubricants in the U.S. is forecast to grow at an average annual rate of close to 2.3 percent in the next five years.
Although certainly not stellar, its a market worthy of attention. But where to focus that attention requires understanding lubricant demand by product category, segmentation and supply rather than simply looking at the industrial segment as a whole.
Process oil is the leading product category in the industrial market, with demand forecast to grow at a rate of 2.5 percent over the next five years. This growth, however, will be fueled primarily by demand from tire and rubber, chemicals and power generation applications. Purchases in these segments are typically made by large companies buying large oil volumes, often supplied under contract from a limited number of majors. Consequently, although there is growth opportunity for process oils due to improved business in the auto industry, new tariffs on Chinese tire manufacturers and other dynamics, the growth will primarily be limited to the few majors that supply close to 75 percent of process oil consumed in the U.S.
Industrial engine oils are the second-leading product category in the U.S. These lubes, used in marine, natural gas, railroad and stationary engine applications, account for close to 15 percent of industrial lubricant demand and are also forecast to grow at a yearly rate of 2.5 percent over the next five years, thanks to increased inland marine and rail activity, energy production and global sea trade. This growth will primarily favor large suppliers and distributors with facilities near ports and strong relationships with global marine engine oil suppliers, in addition to suppliers located near the Marcellus Shale and coal country in the northern Appalachians where growth is forecast in the industrial engine oil product category.
Metalworking fluids present uneven opportunities to suppliers, since its one of the most complicated product segments in the lubricants business in terms of product diversity and machining processes. In addition, its a business comprised of specialty manufacturers with expansive product slates and specialized product support. Because of this, although metalworking fluid demand is forecast to grow at 3 percent per year over the next half decade thanks to the rebound in the automotive industry, as well as an uptick in manufacturing of commercial and industrial machinery and equipment, this growth will favor suppliers whose core business is metalworking fluids.
While some industrial sectors offer growth opportunities to a limited or product-focused group of companies, most suppliers will be able to grow industrial lubricant sales of hydraulic fluids, gear oils, compressor oils and other industrial lubricants sold to a diverse set of end users. Beyond growth in demand volume, industrial lubricants offer suppliers the chance to give higher-value lubrication solutions that address environmental issues, higher temperatures and pressures, improved reliability and other equipment performance and maintenance challenges.
Importantly, though, as the companies that lubricant suppliers do business with grow in response to an improving economy, they will increasingly favor suppliers that have also grown–enough to adequately meet their product and service needs.
Tom Glenn is president of the consulting firm Petroleum Trends International, the Petroleum Quality Institute of America, and Jobbers World newsletter. Phone: (732) 494-0405. Email: tom_glenn@petroleumtrends.com