Grease & Lubrication Industry Market Study

Grease & Lubrication Production Industry Market Study

Scott Jones 12/23/2011

This study focuses on the market potential of producing mineral and vegetable grease using microwave technology.

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Executive Summary

Since the turn of this century the lubrication and grease industry has experienced significant downsizing. Since the mid 2000’s the industry has experienced a sharp decline in sales due in part to the recession starting in 2007 and extensive petroleum company sell offs, mergers and cost cutting measures. Many U.S. producers have moved operations offshore and many suppliers have suffered as a result of this. The petroleum oil refining industry, accounting for lubrication oil & grease production is an 11 billion dollar industry. The grease production industry represents approximately 10% of the total market. There are currently 82 grease producers worldwide. Approximately half of these companies have their operations in the U.S. There are a dozen companies in the U.S. engaged in mineral and vegetable oil grease production. ELM is one of them. It’s an old, low-‐tech somewhat outdated industry with little plant and equipment upgrades which could be a constraint in capital equipment sales.

There is a growing interest in bio-‐lubricants and the use of vegetable oils to reduce petroleum-‐ based oil stock. Some of this development is being driven by environmental and regulatory pressures. Bio-‐lubricant development is a potentially good fit for Marion Mixers biomass and biosolids feedstock mixing and drying development strategies.

The fluid base of grease is typically petroleum oil. The thickening agent usually consists of soap made from aluminum, barium, calcium, lithium, sodium, or strontium. 70% of grease produced today is made from lithium soap. Lithium is not food-‐grade capable and used primary in mechanical devices. Aluminum is a food-‐grade approved lubricant and represents approximately 10-‐15 % of the mineral grease production today. This is the niche that the NABL and ELM are focusing on with microwave processing. However, they continue to peruse R&D in lithium microwave processing even though initial tests resulted in foaming.

Since the grease industry is a smaller overall market it would make sense to consider other chemical and mineral applications that could be targeted using microwave technology. Many of these companies have suitable applications, especially in the building supply industry with caulks, sealants, adhesives and pastes. Further analysis should be conducted to determine the impact of this niche opportunity.

Overall, the grease industry is not that compelling based on size and the potential for capital equipment sales. However, our partnership with AMTek and association with UNI-‐NABL, ELM and the NLGI could result in a favorable business case should Marion Mixers decide to enter this market. I suggest we join the NLGI for an annual membership of $945, look into the ELGI (European Lubricant and Grease Institute) and continue to work with ELM and Dr. Honary on grease applications. Other non-‐grease applications in the mineral and chemical industries should be explored further as well.

Industry Snapshot

The world's lubricant industry refines, blends and compounds oils and greases from mineral, animal and vegetable materials. Slow growth continued to cause problems for the mature U.S. lubricants industry into the early years of the 2000s. The fastest-‐growing segment in this industry, valued at $3 billion in

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2008, continued to be synthetic-‐blended lubricants. Although they represented only 11 percent of the market, synthetic product sales were expected to continue to rise. Synthetics gained popularity because they are considered longer lasting and less toxic than conventional lubricants.

An area under development is eco-‐friendly vegetable-‐oil lubricants. These new compounds, which blend a variety of familiar oils such as canola and soybean, are touted as being nontoxic and renewable, greatly reducing the environmental impact of producing and disposing of lubricants. In addition, some research indicates vegetable-‐based lubricants can perform better in motor vehicle engines and other applications than their petroleum-‐based counterparts.

Safety was a growing issue by the middle of the first decade of the 2000s. In 2004, the Independent Lubricant Manufacturers Association aligned with the Occupational Safety and Health Administration to protect workers from industrial hazards in the manufacturing industry and promote measures available to reduce possible health risks from exposure to lubricants and metalworking fluids. The alliance planned to create training and education programs on the safe and proper use of lubricant products.

At the end of the first decade of the 2000s, most regions of the lubricating oils and greases global market experienced stagnant or limited growth, although some reported growth. Global demand for lubricating oils and greases was projected to reach 11 billion gallons by 2010; according to Global Industry Analysts, Inc. These earlier projections of lubricating oils and greases reaching 11 billion gallons by 2010 were never realized as the industry was significantly impacted by one of the worst economic recessions that started in late 2007.

The United States was the largest exporter of residual petroleum products in the middle of the first decade of the 2000s, followed by Belgium and Germany. The Netherlands was the biggest importer of such products. At the end of the first decade of the 2000s, the Asia-‐Pacific region was listed as the top performing region based on a 5 percent annual growth rate between 2001 and 2010, before reaching 3.5 billion gallons of lubricating oils.

Two of the associations serving the lubricants industry are the Independent Lubricant Manufacturers Association (ILMA) and the National Lubricating & Grease Institute (NLGI). ILMA manufacturing members are independent lubricant companies. These companies assume responsibility for producing more than 25 percent of all lubricants and more than 80 percent of the metalworking fluids and other specialty lubricant products sold in North America. Some Independent members are headquartered in other regions of the world. The NLGI has member companies in 26 countries. The member companies manufacture and market all types of lubricating grease. NLGI focuses on promoting technical advancement as well as new product innovations.

Organization and Structure Manufacturers in this industry compete directly with petroleum refiners in many instances. However, some argue that the increasing degree of specialization required within the lubricants market gives lubricant manufacturers an edge over general refiners because specialized equipment and multiple blending agents are more difficult to maintain in an integrated refining plant than in a lubricant plant.

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Many lubricants from major companies are marketed through independent distributors. In Europe, distributors usually handle one brand exclusively, while U.S. distributors carry multiple brands of lubricants. Still, reduced margins and stiffer competition have spurred some European distributors to move into multi-‐line marketing. Large distributors, with their increased financial resources, generally cover broader geographic areas and handle more brands. They place emphasis on bulk deliveries to commercial, industrial and agricultural customers. More distributors concentrate on selling bulk goods, leaving the "case goods" sales to large retail outlets. Some manufacturers purchase distributors in an attempt to vertically integrate their operations. For example, in 1994 Valvoline Inc. purchased six of its European distributors from the Fuchs Group, thereby greatly expanding its European distribution capabilities.

Pricing

Prices of lubricants depend on several factors, including the base oil stock, additives and other processing costs. The benchmark price of West Texas Intermediate crude (regarded as an industry indicator of world oil prices) was rather volatile in the late 1990s and early years of the first decade of the 2000s. The average was US$14.40 in 1998, US$19.25 in 1999, US$30.30 in 2000, and US$25.92 in 2001. These numbers took a leap in 2006 when they went to around US$60 a barrel. These shifts make it difficult to create stability in the lubricating oils and grease industry because of its reliance on the price of oil on the global market. Fortunately, the major corporations have substantial reserves of oil that help them through fluctuations in price. Therefore the mature lubricants markets such as the United States and the European Union (EU) remained relatively flat in the 1990s.

Toward the close of the twentieth century, some East-‐Asian countries-‐-‐such as China, India, and Indonesia-‐-‐were emerging economies, and in many of these countries state-‐run oil companies controlled the lubricants markets. However, some East-‐Asian countries such as India were opening up their markets. As a result of increasing East-‐Asian growth prospects, development activity was brisk. However, following the outbreak of the Asian financial crisis in the late 1990s, economic development slowed in general, and this included the lubricating oil and grease industry.

Product Overview There are several thousand different lubricant products manufactured in the United States. They fall into the three categories of automotive lubricants, industrial lubricants, and greases. This study is mainly focused on the Grease Manufacturing industry.

Lubricating grease is a solid or semisolid lubricant composed of a fluid lubricant with an added thickening agent. The fluid base typically is petroleum derived, while the thickening agent usually consists of soap made from aluminum, barium, calcium, lithium, sodium or strontium. On occasion, if wide temperature variations are encountered, the fluid base is a synthetic, such as silicone or polyalkylene glycol. In some instances, non-‐soap thickeners, such as modified clay or fine silica, may be

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used. Grease manufacturing in the middle of the first decade of the 2000s was moving toward longer-‐lasting products.

Lubricating oils accounted for about 80 percent of the industry's sales in 2002. Greases amounted to around 11 percent and other miscellaneous lubricants accounted for the balance. Industry sales rose moderately from $6.3 billion in 2002 to $7.62 billion in 2004, then increased significantly to $10.06 billion in 2005. In the U.S. there were 354 establishments engaged in the production of petroleum lubricating oil and grease, most of which were in Texas, followed by Pennsylvania, Louisiana and Florida. Manufacturers of lubricating oils and greases employed 10,646 people in 2005. 5,634 of which were production workers earning an average hourly wage of $22.50.

By the mid 2000’s many small U.S. industrial lubricant suppliers were struggling because many of their manufacturing customers were moving offshore causing a drop in demand. The devastation caused by Hurricane Katrina in 2005 also affected the industry according to Celeste Powers, executive director of the Independent Lubricant Manufacturers Association.

According to David Pirret at Shell Lubricants in an August 13, 2011, press release on PRNewswire, "The global recession has undoubtedly had a significant impact on the lubricants market and brought rapid change and volatility." Global Industry Analysts, Inc., also reported on PRWeb on August 23, 2011, that "economical, regulatory and political issues are rewriting the demand and supply dynamics of the worldwide lubricating oils and greases market." Technological advances continue to lower demand for lubricating oils, and the acceleration of production of synthetic lubricants that cost nearly four times more than standard lubricants is expected to continue.

Current Industry Valuations

For 2010, Dun & Bradstreet reports there were 128 producers engaged in grease and lubrication production shipments totaling nearly $1.1 billion. Greases (blending and compounding) operations had 100 operations valued at $277.4 million. In addition, the cutting oils, blending segment (made from purchased materials) generated $112.5 million.

Global lubricant demand was expected to increase in 2010 with 10 percent growth to 36 million tons compared to 32.8 million tons in 2009. The emerging markets compensation for the volume declines in mature markets was significant. Lubricating oils and greases were on target to reach 10.5 billion gallons by 2015, according to Global Industry, Analysts, Inc., providing there were no additional economic downturns.

Note: estimate varies according to Dun & Bradstreet and the Global Industry, Analysts, Inc.

In mid-‐2011, the major players in the industry announced that the price of lubricants was about to climb between 8 and 12 percent. This announcement came on the heels of increased raw materials costs for such items as fuel and base oil, as well as political and social upheaval in the oil-‐producing nations of the Middle East and North Africa.

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Bio-‐lubricants

In the mid-‐years of the first decade of the 2000s, there was a growing global trend toward the use of biodegradable lubricants. Biolubricants began being used in the mid-‐1990s. That segment was expected to remain small until more regulations were developed that mandated the use of bio-‐lubricants. One application of bio-‐lubricants is in the forest products industry. To harvest trees, heavy equipment that consumes large quantities of lubricants, such as hydraulic fluid and gear oil, is used. Traditional lubricants spewing from hose breaks or other spills could contaminate the forest and remain in the ground indefinitely, while bio-‐lubricants could break down in a short period.

Bio-‐lubricants are frequently based on vegetable oils, such as canola (rapeseed), soybean, and sunflower seed. For example, in 2007 Nano Chemical Systems Holdings Inc. (NanoChem) introduced a "nano-‐enhanced," green motor oil for automobiles that was nontoxic and biodegradable, thus eliminating the disposal issues. According to Lou Petrucci, VP of sales at NanoChem, "Disposing of used motor oil is a constant challenge for do-‐it-‐yourself consumers and, though it is never recommended, they will dispose of it in a variety of ways including dumping it into their yard. With 100% biodegradable oil, this activity will no longer present an environmental concern."

The increased U.S. use of bio-‐lubricants was being legislated in the first decade of the 2000s. The USDA labels a product as "bio-‐based" if 51 percent or more of the makeup is biomaterial. Executive Order 13134 and the 2002 Farm Bill both provided for increased purchase and use of bio-‐based materials by the government itself. The European Union also introduced a new environmental standard in 2005 with the enactment of Euro IV, which imposed tighter restrictions on harmful emissions such as carbon monoxide, hydrocarbons, and oxides of nitrogen. Total Lubricants, one of the world's leading oil and gas companies and the fifth largest lubricants producer, began developing, in cooperation with Idemitsu Kosan of Japan, a "new generation of lubricants" to comply with the standards, according to ECN-‐European Chemical News.

The oil and grease industry, like most industries in the modern economy, continue to come under pressure from environmental groups. According to the National Petrochemical and Refiners Association, between 30 and 40 percent of petroleum-‐based lubricants sold in the United States were accidentally released into the environment in 2004.

Industry Leaders

Exxon Mobil Corporation of Irving, Texas, is the leader in the petroleum lubricating oil and grease industry. Chevron Corporation of San Ramon, California is the second-‐largest U.S. integrated oil company. Other industry leaders include: Gulf Oil Limited Partnership of Chelsea, Massachusetts, Shell Oil Products U.S. of Houston, Texas, who also bought former industry leader Pennzoil-‐Quaker State Company. The Jiffy Lube quick oil change chain and other oil-‐related businesses, mostly in the West and Midwest, were also Shell subsidiaries. The Valvoline Company in Lexington, Kentucky, was another leader in the oil change segment, just behind Shell.

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World Grease Producers

Company (Producers) Country % to Total

Germany Count 17 21.52% United Kingdom Count 12 15.19% France Count 6 7.59% The Netherlands Count 6 7.59% Spain Count 4 5.06% United States Count 4 5.06% Greece Count 3 3.80% Italy Count 3 3.80% Poland Count 3 3.80% Ukraine Count 3 3.80% Iran Count 2 2.53% South Africa Count 2 2.53% Turkey Count 2 2.53% Austria Count 1 1.27% Belgium Count 1 1.27% Bulgaria Count 1 1.27% Czech Republic Count 1 1.27% Hungary Count 1 1.27% India Count 1 1.27% Northern Ireland Count 1 1.27% Russia Count 1 1.27% Serbia Count 1 1.27% Sweden Count 1 1.27% Switzerland Count 1 1.27% Tunisia Count 1 1.27% 79 100.00%

Company Country Nynas-Technol HandelsGmbH Austria

Belgian Shell S.A. Belgium

Verila Lubricants JSC Bulgaria

Paramo a.s. Czech Republic

Christol Grease France

Condat SA France

Esso SAF France

Nyco S.A. France

Raffineries Impérator France

Spirel S.A. France

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BP Europa SE Germany

Carl Bechem GmbH Germany

Dow Corning GmbH Molykote Germany

Dr. Tillwich GmbH Germany

DuPont de Nemours (Deutschland) GmbH Germany

Esso Deutschland GmbH Germany

Fragol Germany

Fuchs Europe Schmierstoffe Germany

Fuchs Lubritech GmbH Germany

Klüber Lubrication München KG Germany

LUBCON Lubricant Consult GmbH Germany

Meguin GmbH & Co.KG Mineralölwerke Germany

Rhenus Lub GmbH & Co. KG Germany

Setral Chemie GmbH Germany

Shell Global Solutions Deutschland GmbH Germany

TUNAP Industrie Chemie GmbH & Co. Produktions KG Germany

Zeller + Gmelin GmbH & Co KG Germany

Century Oils Hellas Abee Greece

Eldon's SA Greece

Slider S.A. Greece

Mol-Lub Ltd. Hungary

Standard Greases & Specialities Pvt. Ltd. India

Pars Oil Co. Iran

Sepahan Oil Co. Iran

NILS A.G. Italy

Solvay Solexis Italy

Viscol SpA Italy

Toma Lube "Division" Northern Ireland

Lotos Oil SA Poland

Orlen Oil sp. Z.o.o. Poland

Silesia Oil Sp. z o.o. Poland

Intesmo Russia

Fabrika Maziva FAM A.D. Serbia

Engen Petroleum Ltd. South Africa

Lubritene (Pty) Ltd. South Africa

Brugarolas S.A. Spain

Krafft S.L. Spain

Petronas Lubricants Spain, S.L.U Spain

Verkol S.A. Spain

Axel Christiernsson International AB Sweden

Shell Lubricants Switzerland AG Switzerland

Anderol BV The Netherlands

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Axel Christiernsson The Netherlands

Interflon BV The Netherlands

KLT The Netherlands

Lubricoat B.V. The Netherlands

Total Lubricants plant Beverwijk BV The Netherlands

Sotulub Tunisia

Belgin Madeni Yaglar TIC VE SAN A.S. Turkey

Petrol Ofisi AB Turkey CLL SIE "AGRINOL" Ukraine

JSC "AZMOL" Ukraine

KSM-Group Ukraine

Chemtura (Crompton Petroleum Additives) United Kingdom

Fuchs Lubritech (UK) Ltd. United Kingdom

Ironsides Lubricants Ltd. United Kingdom

Jet Lube (UK) Ltd. United Kingdom

Lubricants UK Ltd. (Castrol) United Kingdom

New Tech Lubes Ltd. United Kingdom

Petro-Canada Europe Lubricants Ltd. United Kingdom

R.S. Clare & Co. Ltd. United Kingdom

Rocol Lubricants United Kingdom

Shell Research Ltd. United Kingdom

United Oil Products United Kingdom

Vickers Oil United Kingdom

Bel-Ray United States

ExxonMobil United States

Nye Lubricants United States

Southwestern Petroleum Corporation United States

Grease Marketing Strategy Following are notes taken from a meeting held at ELM in the fall of 2011 based on feedback from consultant, Dick Burkhalter with Covenant Engineering Services, Inc. and an active board member of the NLGI. According to Dick, there are 152 current members of the National Lubrication and Grease Institute (NLGI) as follows:

Active / Manufacturing: 82 Companies engaged in the manufacturing of lubricating grease from basic raw materials. Half are based in the US. A notable large US producer, Chemtool was acquired by Lubrizol which was bought recently by Warren Buffet’s Burchfield Hathaway. There are many consolidations and acquisitions occurring.

Associate / Supplier: 37 companies allied with or supplementary to the manufacturing of lubricating grease, but not a manufacturer or marketer of lubricating grease.

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Marketing: 33 companies engaged in the marketing or selling of lubricating grease, but not a supplementary business nor a manufacturer of lubricating grease.

The three major companies currently making grease are Exxon Mobil, Chevron and Citgo according to Dick. All other petroleum refineries farm it out.

Around the year 2000 there was a major paradigm shift due to cost control strategies. Many plants were shut down due to excess capacity which balanced market demand. Mr. Burkhalter indicates that timing is good to modify the production process due to:

• Plant upgrades • Some renewed interest in new product development and production techniques • Pending future environmental issues • Product reliability and forecast increase in demand

The five main competitive forces that will shape strategy are:

1. Existing competition 2. Customers 3. Suppliers 4. Potential entrants 5. Substitute systems

The grease production industry has been a low-‐tech, old industry with little change over the past 100 years. Older equipment exists in many plants that were commissioned early in the 20th century. Few plant production personnel are educated on advanced technology in their industry. Plant personnel “buy in” is crucial to plant equipment upgrades.

There are many technology copycats in the industrialized developing companies of Brazil, India, Russia and China (BIRC). In some countries patent protection is weak or non-‐existent. In addition, there is significant protectionism, especially in China and Germany. It is very difficult to enter these market.

Current technology The open kettle is a slow process. Average equipment cost is approximately $250-‐300K and may range in size from 70-‐700 cu. ft. depending on the application and output. Open kettle processing is similar to conventional drying technology with the usual safety, operability, environmental and maintainability issues. Many systems continue to use hot oil and steam. The preferred system would include a high pressure, contactor batch reactor system. However, there is more risk of developing this system for the market. One constraint is industry downsizing. Many manufacturers went to smaller-‐medium sized plants in geographic clusters to save costs. Installation of new capital equipment could be challenging. This would vary by country. For example in England with major producer Lubrizol a pilot-‐size to scale up process would make sense with market aggregation into Europe. However in Russia, Asia and the Middle East this model may not work because plants have limited development capabilities.

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Some marketing strategies Mr. Burkhalter suggested:

• Well planned consultative selling • Target the low-‐hanging fruit; large processors and large independents. • Consider the European market and plan for developing international market opportunities. The

European market technology with early adopters to change may have more opportunities than the US market which is slow to change.

• Target specific industries. He indicated the soap industry would also be a good industry. He has considerable experience in this industry.

• Achieve “first-‐mover status” few companies in the US are currently pursuing innovative technology change in the grease industry.

Within the worldwide oil industry, lubricants and grease constitute a downstream specialty business that generates significant revenues and profits for producers. Most of the major oil companies are key players in the lubricants industry, but independent producers still hold a significant share of lubricant volume in many countries. The highest volume of lubricant consumers includes those in rubber manufacturing, transportation and equipment, passenger cars, chemical manufacturing, and railroads and aviation. Other industrial users of lubricants are those involved in primary metals such as aluminum, steel plants, and mining; the printing industry; fabricated metals; food processors; and pulp and paper manufacturing.

Aside from grease applications there are other market opportunities in adhesives and sealants, slurries and pastes, plastics and composites and many building materials like caulking materials etc. Over the last 10 years we have shipped mixers to 72 different companies with chemical applications and 111 different companies involving mineral applications. Many of these companies could be prospective buyers of microwave technology based on the Marion Mixers/AMTek designs and technology and R&D from the UNI-‐ NABL test Lab in Waterloo and ELM manufacturing in Grundy Center, Iowa.

Grease Production

70-‐80% of the grease being produced today is with the lithium additive and is used mainly as mechanical grease. Of the remaining complex greases, the aluminum additive at 10-‐15% of market share is being developed with interest because it has food-‐grade capabilities. This is current the niche market ELM is working on. They have tested lithium in a microwave process and it has a foaming issue but continue to perfect the processing on this additive.

Grease & Lubrication Industry Market Study

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