When the Clouds of Corona Clear
As most are painfully aware, all businesses in the lubricants value chain have been negatively affected by covid-19. In addition to a precipitous drop in sales, they have seen substantially higher operating costs and expenditure of unbudgeted funds to ensure the safety of their employees and maintain the continuity of their business.
The speed and duration of the impact have varied by where businesses reside in the value chain, their product and market mix, geographic location and other variables.
Some marketers on the West Coast of the United States, for example, say that their commercial automotive and industrial lubricant sales have been hardest hit, while many in the Northeast have seen the deepest cuts in sales of passenger car motor oil for the installed segment.
Significant differences are also seen within the industrial lubricants segment. Although some marketers selling mostly to pharmaceuticals, healthcare, consumer staples and utilities sectors experienced modest declines in demand for industrial lubricants, those with a high concentration in drilling, fracking and gas compression business took heavy hits from the double punch of covid-19 and depressed crude prices.
When you add it all up, 2020 will be an ugly year for lubricant sales. Assuming a recovery is currently underway, many marketers say their sales volumes will be off by nearly 30% from the first 6 months in 2019.
|
When the dark and stormy demand numbers of 2020 clear out, covid-19 will likely have made the lubricant business stronger and more resilient.
|
In terms of value, although the year started off with announced price increases in the range of 30 to 40 cents per gallon, most were rescinded in February due to the crash in price of crude. Lube prices slid another 50 to 60 cents over the past three months as marketers fought to keep sales afloat while demand plummeted due to the pandemic. The net result of the lost sales volume and backslide on prices will cut close to $3 billion off the value of the United States lubricants business in 2020.
But when the dark and stormy demand numbers of 2020 clear out and become last year’s news—and hopefully only a short-lived blip in the lubricant demand curve—covid-19 will likely have made an indelible mark on the lubricant business, and in the process made it stronger and more resilient.
An unfortunate reality of the pandemic is that there have and will continue to be casualties among suppliers due to the severe financial pressure from the steep drop in demand. While various sources of financial relief will help many stay afloat, companies lacking sufficient revenue and cash reserves will be forced to exit or sell.
Although merger and acquisition activity appears to be taking a pause during the pandemic, there will likely be an increased number of attractive acquisition opportunities as the market recovers. This will accelerate consolidation in a market that remains saturated with suppliers even after two decades of significant trimming. The process will also result in a more disciplined market and de-escalate the high intensity of competition seen among suppliers.
Similarly, the financial strains caused by covid-19 will ramp up consolidation among lubricant buyers. This will accelerate a trend already underway where the big customers are getting bigger and the small are going away. While these casualties are unfortunate, doing direct business with a smaller number of larger customers has a positive impact on a lubricant marketer’s bottom line. In addition to reducing transaction and customer acquisition costs, it reduces risks and typically improves supplier-buyer relationships.
The accelerated consolidation will be particularly advantageous for lubricant marketers that have deployed enhanced supply chain management platforms. These include artificial intelligence and other technologies that collect and analyze transactional data and enhance information sharing, transparency and the efficiency of communication with suppliers, buyers and employees. The social distancing of covid-19 helped underscore the value of such technology. This will increase marketers’ interests in being more closely aligned by contract, connectivity and collaboration with their finished lubricant suppliers and customers.
One concern magnified by the pandemic is the risk tied to businesses with a large percentage of sales in one product segment or industry sector. One doesn’t have to imagine what the sales of such a business would look like in a market where electric vehicles dominate the passenger car parc. The past three months of abysmal PCMO sales provides a glimpse into that future. It’s likely some lubricant manufacturers and marketers will now look to spread their risks by further diversifying their product and market base. Such diversification could include entry into new product markets.
As seen by Smitty’s Supply, Environmental Lubricant Manufacturing, Lubrication Specialties Inc. and others when they quickly converted packaging lines to make hand sanitizers and other cleaning products during the pandemic, the core competency of lubricant manufacturers centers on blending and bottling capacity and their distribution networks. Such competencies can be used to produce other products, which in some cases afford blenders and marketers with significantly higher margins than lubricants.
But it may be that the longest-lasting change covid-19 will bring to the lubricants business will be far less visible. Instead, it is taking place behind closed doors in the conference rooms and offices where many are already examining and enhancing their business strategies, training, focus and contingency and continuity plans to assure they are best positioned to weather the next storm.
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