Which Way Is Up for North American Industrial Lubricants?
Interested in plotting the best path forward for industrial lubricants in North America? You’ve come to the right space.
To do so, we pick up where we left off in our Seize the Moment! blog post, which kicked off this topic with the brief global outlook.
By way of background, when we look out onto the horizon, the global road since 2000 has and continues to be flat for industrial lubricants – essentially flat volume growth. That applies to the constituent North American region too. But, within this otherwise level terrain, there are some peaks, AKA new opportunities. What are they? How can market participants access them?
In other words:
What strategies and portfolios will deliver leading value in North American industrial lubricants?
We start by reviewing the gross margin pools in the global integrated lubricants business portfolio: (1) base oil refining; (2) specialty chemicals/additives; (3) lubricants marketing; (4) lubricants distribution; and (5) trade and services. Of them all, the leader hands down for margin opportunities is lubricants marketing, heading the pack since 2000 and continuing in the #1 position going forward. In fact, according to the latest 2017 data, lubricants marketing accounts for almost half of the $69 billion in total integrated gross margins.
Analyzing marketing value in North America reveals more. Based on 2017 data, the 2017 total margin pool is $6.4 billion. The average unit gross margin across all lines of business – consumer synthetic, industrial, consumer mineral and specialty and commercial – is 82 cents per liter. Industrial claims the biggest slice of the pie; it accounts for 34% of the whole, or $2.2 billion.
Let’s zoom in
How does North American industrial lubricants fit into the wider context? What are the implications by region and market participant? The worldwide market for industrial lubricants stands at $30 billion in revenue. Of the whole, North America represents 24%, or $7.2 billion. As for the types of market participants, they fall into two main categories; we dub them “competitors” and “enablers.”
When we peek into the competitor bucket, we find multinational and national oil companies. They have broad product lines and command higher volume segments. They also leverage brand and scale. They largely are integrated with base oil production. And they typically dominate higher volume segments and are delivering in the range of 12-18% EBITDA.
Then there are independent industrial specialties and chemical companies. They dominate grease, metalworking and other niche application segments through in-house proprietary formulations. By leveraging their strong R&D, they develop close relationships to serve OEMs and end customers. And they are delivering within a broad range of 5-20%; it all depends on their portfolio mix and how they go to market.
Specialty chemical and additive companies take their place in the enablers column. They are integrating forward; however, conflict issues limit their scope.
Putting it altogether
Competitive headwinds are blowing in North America. These strong forces constrain organic growth in industrial lubricants. That leaves inorganic options. To that end, we are in the midst of a very active period of players seeking such transactional opportunities. We expect this situation to continue for the next few years… only interrupted by changes to our economy.
So where are the best opportunities now?
In the movie The Graduate, Benjamin receives advice about the future – “One Word: Plastics.” In the context of this blog, that phrase would be “Greases and Metalworking.”
For the upside in North American industrial lubricants, we follow the signs to where innovation is driving the need for higher performing products. Synthetics is one of them.
A lot of strategic focus is on the North American greases and metalworking markets. It’s for good reason. They contribute 50% of the total industrial margin pool. Plus, margin growth is projected to outpace the industrial business average. Although volume growth is slowing, the premium product mix means that unit revenues are 20-70% above the global average.
Innovation is fast at work for higher performing formulations. Calcium sulfonate and polyurea thickeners are growing; lithium thickeners are declining. Synthetics are needed for extreme pressure and temperature conditions in aerospace, automotive and high-speed manufacturing.
Innovation is needed to extend life and minimize waste treatment services. The same applies to the need for non-chlorinated paraffin EP solutions, and lower VOC products to reduce airborne pollutants. What’s more, high-speed machining technology requires more semi-synthetics for durability.
It’s true that the lubricants business has a mixed history of making money by providing services to customers. This is largely because they have lacked a competitive cost structure. That’s changed.
Welcome to the new reality. It’s full of digital and intelligent services. Opportunities build upon and connect with legacy digital processing, marketing models and supply chain systems. They optimize inventory costs. They guarantee on-time deliveries. And they do more.
There are representative investments to cite. Shell LubeChat, the first AI-powered chatbot for B2B lubricants customers and distributors, performs monitoring and maintenance. Fluid Vision Technologies LLC provides industrial fluid automated monitoring self-optimizing technology to support smart factories and reduce the cost of ownership. Yoshi Inc., a startup company, offers subscription-based, on-demand fuel delivery and mobile vehicle car care to B2B and B2C customers in 25 U.S. cities.
How far are lubricants players willing and able to move in this direction? How successful will they be in shedding their cultural heritage and building new capabilities? It remains to be seen.
Reaching for aspirations
Three strategic pathways could deliver on aspirations for growth:
- Consolidation plays
Consolidate marketing and distribution. These plays, enabled by digital technology, take down costs, expand reach and drive service support. Successful examples include: Reladyne, Brenntag and Parkland Fuel
- Re-balancing of portfolios
Re-balance portfolios in favor industrial products and services. Best sectors are those undergoing automation and technology transformation. Big multinationals are engaged in these pursuits, e.g., BP, ExxonMobil, Shell, Total
- Adjacency strategies
Move into businesses you never imagined or considered. Adjacency enables players to leverage core strengths into trade channels (e.g., quick lube, workshops, auto parts distribution, service centers)… OR backward integrate into refining, chemicals and specialties… OR step into “the Blue Oceans” with a digital technology.
These activities require a lot of new learning. Savvy participants will bridge the challenges and succeed. They will seize the moment. And they won’t procrastinate.