Slipping industrial demand will soften some lube prices

By By Elena Epatko Murphy -- Purchasing, 4/5/2001

Despite higher raw material costs, lubricant prices will soften slightly this year. Overall demand will remain steady as several dominant markets show signs of weakness. As a result, no supply shortages are expected over the next 12 months.

"Current demand for industrial lubricants worldwide is flat," says James Girard, vice president and general manager, Lubriplate division, Fiske Brothers Refining, Newark, N.J. Pharmaceutical orders and those from food and beverage are contributing to steady demand. With significant markets such as automotive and machinery manufacturing also growing less, the need for lubricants will decrease, according to market research firm, The Freedonia Group, Cleveland, Ohio.

There has been supply-side price pressure on lubricant suppliers. Peggy Montana, vice president, lubricant marketing, at Equilon Enterprises, a U.S. joint venture between Texaco and Shell Oil Co. located in Houston, Texas, says raw material prices are higher. For instance, she says, "Base oil prices have increased significantly over the last year due to crude oil price increases" and a tight supply and demand balance in the U.S. market.

Girard agrees raw material prices for lubricants "skyrocketed in 2000." Petroleum-based additives have been especially high over the past year and there is little relief expected. Says Girard, "When OPEC (Organization of Petroleum Exporting Countries) cuts production or threatens to, prices for raw materials used to manufacture lubricants always rise."

Though material costs are higher, lubricant tags will show slight decline. Montana notes, "slower economic growth puts downward pressure on pricing." However, she adds that though lubricant demand may "start to taper off," the decrease in market activity will not be dramatic.

Freedonia's research forecasts steady, but not stellar, growth for lubricants in a number of markets. For instance, lubricant demand in rubber and plastics, and food and beverage applications will expand over 2% annually. Food processing will benefit from its less cyclical nature, compared with other industries. Cosmetic and toiletries and inks markets will be more sluggish, though Freedonia sees paper and textile applications recovering.

Though expectations for lubricant demand is modest, there are some end-use markets that will post higher gains, say analysts at Freedonia. Examples include fire-resistant fluids, refrigeration oils designed to work with non-CFC (chlorofluorocarbon) refrigerants, high-quality white oils, and lubricants based on synthetic, synthetic blend, vegetable oil and certain highly refined petroleum basestocks. Process oil orders will expand because they are less affected by recycling programs.

Supply stream open

Supply levels of lubricants are meeting demand and no shortages are expected. Leadtimes are limited. Mergers and acquisitions will continue, but at a slower pace than in recent years.

Girard says keeping high inventory levels of finished product is critical to meeting customers' tight schedules. He notes, "Industrial distributors have reduced their inventories and are relying on us to ship their stock orders very quickly." He also points out supply levels for raw materials, such as base oils, are adequate.

Buyers are reporting leadtimes of just over a week, according to the most recent PURCHASING survey. Leadtimes are down from the two weeks buyers were seeing just a month ago, and are lower than the 1.5 weeks buyers experienced a year ago. Nearly all buyers obtain lubricants between one and five weeks.

The most recent change in the lubricants industry is the proposed merger between Chevron, a lubricant industry leader, and Texaco announced late last year. The companies plan to create ChevronTexaco by midyear.