What is the “Lubricants” Business?

Compoudings Magazine, January 2002

By Thomas F. Glenn

President,  PetroTrends, Inc.

The simple answer is that the US lubricants business is an industry that sells nearly 2.5 billion gallons of engine oil, hydraulic fluids, process oil, metalworking fluid, grease and other finished lubricants valued at close to $10 billion in 2000 to a variety of end-use applications. To fully appreciate the true value of the business, however, and the changes, challenges, and business opportunities it represents, one must look beyond the walls of the stock keeping units (SKUs) and end-use applications that commonly define its boundaries.  Instead, the “lubricants” business is best appreciated when it is viewed as a number of integrated links in a complex value chain of other businesses, products, services, participants and stakeholders.

 As the first in this column on top line issues, this article touches on some of the key segments in the  “lubricants” business. Future Top Line articles will start at the top of various segments of the business and drill down to provide insights into market and technology developments, and other issues that impact value creation, competitive advantages, and business opportunities for all participants and stakeholders active in the “lubricants” business, including:  

FROM THE TOP…

 The “lubricants” business gets its start in the upstream segment of the petroleum business. Upstream, also known as exploration and production (E&P) explores for and produces crude oil and natural gas. Midstream follows and is primarily engaged in storing and transporting crude oil and gas after it is produced. Downstream is next and includes refining of such products as fuels, petrochemicals, lubricant base oils and others. Downstream also includes blending and packaging, and distribution. Although downstream refiners produce a wide range of petroleum products, most do not produce base oil, the primary component in a lubricant. Instead, they focus production on meeting demand for motor fuels.

 The downstream base oil business comprises three primary segments with a number of suppliers participating in each, including paraffiic, naphthenic, and others (PAO, esters, and others). Paraffinic base oil producers employing solvent dewaxing technology typically also produce wax as a byproduct of base oil production. Consequently, wax is another leg in the lubricants business.

 Base oils are consumed by three groups of lubricant manufacturers. The largest are the lubricants business units of major oil companies. Majors consume nearly 75% of the total US base oil production. Over 200 independent lubricant manufactures, contract blenders and packagers consume most of the balance.  Majors, independents, brokers and agents export a relatively small quantity of the balance.

 Lubricant additive suppliers are also an integral part of the lubricants business. Additives are available from four large producers and wide range of specialty additive and chemical suppliers. Although some lubricant additive suppliers are basic in some of the chemicals used to produce additives, many purchase base chemicals and intermediates from other bulk and specialty chemical suppliers, thus making some of these too participants in the lubricants business. Lubricant additive suppliers provide considerable value in the supply chain.

 Finished lubricants are typically packaged in 55-gal drums, 1- to 5-quart plastic containers, 5-gal pails, kegs, and a range of other package types. In addition, finished lubricants are commonly shipped in bulk by rail car or tank truck. Although the universe of packaging material suppliers is relatively small, they too are important participants in the “lubricants” business. In fact, some have manufacturing facilities that are actually integrated with a manufacturer’s blending operation.

 Distributors are also a key part of the lubricant business. Lubricants are moved from the manufacture to the end user either directly, or through distributors. With direct sales, buy backs, and other agreements taken into consideration, distributors deliver over 75% of the total lubricant moved from the manufacturer to the end users. In addition to delivering product, distributors can also add considerable value in service and expertise. Of the roughly 10,000 distributors selling lubricants in the US market, an estimated 2,500 make up the core network. 

Whether sold direct or through distributors, end users are the reason the “lubricants” business exists. The end-use markets are diverse and diffuse. They comprise a wide range of applications, including railroads, marine, textiles, trucking, construction, mining, metal fabricators, mills, and many other segments of transportation and industry. In addition, end users include the motoring public.

 The lubricants business also includes fast oil change companies, and other do-it-for-me (DIFM) concerns that service consumer and commercial accounts for a fee. And the industry doesn’t end here. It also includes companies engaged in waste disposal, preventive and predictive maintenance, recycling, and rerefining. Other product and service companies are also interwoven into the fabric of the lubricants business.

 So at the end of the day, although 2.5 billion gallons and $10 billion may be commonly used to define the size of the lubricants business today, under the covers of these often-sited numbers lays the true value of the business and its opportunities.

Copyright © Petroleum Trends International, Inc. 2002