This year’s ICIS conference in London provided plenty of thought-provoking insight and highlighted some key thoughts on the lubricants industry.
In particular, Arthur D Little's (ADL) Jaap Kalkman reviewed the current oil price challenge and demonstrated two critical issues:
- The supply factors that have dropped crude prices were in place in the early part of 2014 as over-supply emerged more clearly.
- The swing factors have changed from Saudi Arabia to the “economically rational” and independent US shale gas producers. Therefore, in the short-medium-term the oil price will be focused around their marginal cost of production - i.e. in the region of $55-70.
He also commented (as OATS has stated in the past) that this represents a massive wealth transfer from oil exporting to oil importing nations, with a resulting increase in global car demand. This in turn, has probably accelerated global economic growth, due to higher economic multipliers in oil importing countries.
Providing a 'black swan' event doesn't intervene, increased global GDP growth is set to stimulate industrial activity which essentially means industrial and other lubes markets can expect a slight additional increase in demand. This, combined with cheaper fuel, is bound to lead to increased transportation kilometers, prompting additional growth for Group I as well as II/III base oils, so delays in some proposed plant closures are possible.
Fuchs' Apu Gosalia reinforced this scenario with a forecast for lubes growth of 0.5% globally, but with a demand shape that is substantially different from a decade ago. In 2000, Europe provided 27% of global demand; now it is down to 19%, while AsiaPac and ROW grew to a 53% in 2014. The US market has shrunk proportionately and raises the question: how much further would its share drop if it adopted European-type lubes change intervals?
So, while global lubricants demand in volume terms has hardly changed at around 35-36m tonnes, despite huge economic growth, the value has altered enormously.
Suzan Jagger, of the eponymous Jagger Advisory, claimed lubes companies had increased their gross margin by more than 2.5 times. How? By focussing on the following:
- Key value drivers
- COGS escalation
- Supply chain consolidation
- New Route to Market models
- Portfolio up-trading
- Digital marketing.
According to Jagger, since 2006 the gap between the leaders and the laggards has become substantial, as the leaders focussed on COGS escalation, portfolio up-trading and AsiaPac growth. What is clear is the returns on the digital marketing initiatives, where carefully managed, are significant.
The challenge for the rest of the industry is to catch the leaders and ride the wave of new and changing technologies. Unlike the lubricants industry, the tech sector has seen the big winners of just six or seven years ago, such as Nokia and others, virtually disappear, leaving Apple and Google to dominate, even to the point of becoming disruptive technologies in the car market.
Rob Shama, from Afton, examined lubes specifications and called for minimum standards as opposed to a “belt and braces” approach to specification setting. He also challenged the industry to improve its marketing – illustrated by suggesting how toothpaste marketing might look if it were undertaken by lubricants marketers. Clearly the lubes industry needs to brush-up on its techniques if it is going to compete with the likes of Apple.
Managing portfolios, rationalising ranges whilst creating new digital ways of doing business, is transforming the lubricants sector. But, to be effective, there is a need to study the linkage between lubricants required, equipment, specifications and demand. Tools for undertaking this sort of analysis will be at a premium. Having the ability to combine those internal and external data sources is what OATS' earlFUSiON is all about and we are already seeing demand for the platform and the products and services being developed from it.
To find out more about earlFUSiON, or comment on anything you have read in this month's Bulletin, simply contact us by e-mail or follow our updates on social media via Twitter, Facebook, LinkedIn and Google+.
Sebastian Crawshaw
Chairman - OATS