OATS Managing Director, Mike Skypala, asked some of the Lubricant industry’s influencers to join him in gazing into the sector’s crystal ball and making some predictions for the decade ahead.
A full version of this article was published in the February edition of Lube magazine. Subscribers to Lube Digital you can find it here.
It already feels like the landscape has changed quite significantly, at least politically, since the article was first drafted. For example, I’m sure the British royal family did not expect to go through their recent turmoil.
We’ve entered into an era of greater uncertainty and upheaval. How long it will last is anybody’s guess and so our industry, like many others, will need to become highly adaptable and better equipped to deal with shocks while, at the same time, embarking upon a period of re-invention.
Evolution not revolution
In our previous blog discussing the evolution of lube selectors, we talked about the changing role and importance the lubes industry will have on the development of the automotive and other industries. As a result, there’s a need for us to change our business model towards providing analytics and new digital marketing solutions. This is something I have recognised coming into this industry.
BCG, the global consultancy, produced a report on “How to thrive in the 2020’s” which claims that to survive, businesses will need to improve their ability to learn and adapt; build stronger ecosystems; invest in AI and IoT; continuously re-invent themselves, become more resilient to broader events; mandate diversity and combine business and social value.
Which of these will be most important to the Lubricants Industry?
Industry consensus recognises the significant uncertainty. Lube Magazine’s editor, Andrianne Philippou, offers this outlook: “Geo-political tensions and sensitivities will continue to disrupt trade and distribution flow through interrupted supply chains, embargos, trade tariffs and price wars. Expect more consolidations, acquisitions, mergers and some liquidations as companies come together or fail to overcome the restrictions and constraints in an international minefield.”
However, Christian Hartmann - Independent Consultant and Director of Lubey AG – offers a more optimistic, if controversial, outlook: “I share the OECD and World Bank’s view that the next decade will be a prosperous one. Why? Because the world has learned to live with the characters like Trump, Johnson, Putin, Erdogan and Bolsonaro. Plenty of money is available and there is no substantial crisis.”
Guessing the geography
In terms of shifts in geographical influence for the lubricants industry, most predict overall growth of both supply and demand but with a continuing change in world balance.
According to UEIL President, Valentina Serra-Holm: “The production footprint is not likely to change dramatically over the next decade. Asia will continue to play an important role as demonstrated by, for instance, the impact of the Industry 4.0 program kicked off by the Indonesian government in the end of 2018. This was designed to improve the flow of goods, empower SMEs, increase foreign investments and strengthen the national digital infrastructure and will generate new opportunities in automation and robotics, IoT, and advanced production methods, which will likely positively impact the lubricant industry.”
However, almost without exception, the experts cite the ongoing trade war between the US and China as arguably the most significant political influence on the lubricants industry. According to ILMA: “As 2019 came to a close, it appeared that progress was being made toward resolution of trade issues between the US and China. If there’s an agreement to made, it will happen early in 2020 and will be fairly modest in scope. If negotiations drag out through Spring, all bets are off.”
Most also believe that Africa will emerge as a more important region, with growth being predominantly driven by direct investment from China, India and the Middle East. Valentina states: “On the demand side, an upside could be represented by a growth in demand in Africa, as most of the developed countries in the region are focusing on mechanization in their key sectors, such as mining and agriculture, supporting an increased lubricant demand.”
For some, such as Jim Douglas, Senior VP of Warren Distribution – the picture is more confusing: “Africa and India to me are enigmas because, as regions, the adoption of better technology and use of high quality lubricants have economic impacts that the growth doesn’t appear able to support at this point. It seems the cost aspect can only change through the development of regional production, but it hasn’t fully begun as yet.”
The climate and electric factors
The climate emergency, which is driving the development of bio-fuels/lubes and alternative-powered vehicles, is definitely going to be a major theme in this decade. Independent consultant and BP Castrol’s former Technical Manager, Brian Utton, summarises: “Climate change will increasingly drive markets and policies as the effects become more and more visible. Carbon taxation will become more punitive as people realise current levels are ineffective in reducing CO2 emissions by the amount needed. Fossil fuel companies will continue to fight it whilst trying to not be seen to be the villains and a key concern will be avoiding throwing low income families into fuel poverty. Carbon dividends for citizens, as advocated by the oil industry, address this but do not appear to be a preferred option for Governments at this time.”
Terry Dicken, Chairman of ELGI, thinks: “lubricant companies will continue at a pace to develop bio derived products, where the performance of such products can now match that of conventional petroleum-based lubricants…but sales will not take off without Government incentives”.
The changing nature of the automotive industry, due to electrification and changing vehicle ownership patterns, is leading to huge consolidation amongst the OEMs – evidenced by the latest merger between Fiat Chrysler and PSA. The impact on the Lubricants industry will be enormous and will start to bite in this decade, but it will also drive significant innovation.
While it is clear that EVs are here to stay, there are mixed opinions regarding how quickly the adoption tipping-point will arrive – or even arrive at all – this decade. The outcome of the battle for dominance between electric and hydrogen cell technology, according to ILMA, is also likely to be decided by the middle of the decade.
A digital decade?
Digitisation appears to be more contentious; blockchain in particular. Some see digital marketplaces, blockchain, telemetry and AI coming of age for the lubes industry. Christian Hartmann states: “Digital marketplaces will have the greatest impact to the industry within the next decade. All kind of sensoric technology will influence tribulogic aspects, including "upgrading lubricants" instead of changing them. Blockchain applications will increase in "big" applications.”
Others, however, are more skeptical. Jim Douglas, for example, cites the undelivered promise of RFID on supply chain efficiencies. I have sympathy with this view, having seen how long it took big data to really take hold in retail and it’s still not really changed the fundamentals. My advice is to invest wisely, keep experimenting and build a good ecosystem with tech and consulting businesses in areas such as oil analysis, stock management and recycling.
Back to base
When it comes to base oil predictions, Blake Eskew from IHS Markit offers this summary: “Base oil production will continue to move through the capital replacement cycle that has been in progress since the late 1980s, driven by the economic and product quality advantages of hydro-processing versus solvent processing technology. Greater availability of high-quality base oil will encourage more rapid spread of more stringent lubricant specifications globally, leading to smaller differences across regions and improved performance in all markets.”
Meanwhile OATS Technical Consulting and OEM Manager, Paul Stephenson, states: “Group III will overtake Group II base oil because it ‘does more’ in terms of quality, while Group IV base oil will continue to expand but at a slower pace than Group III because of production constraints.
The challenge ahead
So, going back to the BCG ingredients required to thrive in the 2020’s, the overall themes which OATS and most in the industry recognise and are already embracing are: the resilience to broader events, building ecosystems and combining business and social value.
The themes which may prove a greater challenge for many businesses, and where there is less industry consensus, is investment in AI and IoT and the need for continuous re-invention given the level of capital investment required to operate successfully in the industry. And yet, these two, along with recruiting a more diverse talent pool, is what the industry will need to address if it is to continue to evolve and prosper. Those businesses which recognise this will probably be the ones that will dominate the industry by the end of the decade.