ILMA Annual Meeting · Market Situation • Global lubricant market was 39.4 MT (11.7 billion gal)...

www.klinegroup.com

ILMA Annual Meeting

The Evolving Business Dynamics of the Lubes Industry

A presentation at:

Scottsdale, AZ18th October 2016

1

Kline Energy is about enabling decision making and helping craft successful strategies for companies active in the entire lubricants value chain

Managed flow of people, ideas and data

Individual client consultationsaddress specific business

issues and help implement solutions

MANAGEMENT CONSULTING

MARKET

RESEARCH REPORTS

Readily available multi-client reports identify

market opportunities andcreate action plans

Translating market intelligence into successful strategies

2

Contents

GLOBAL LUBRICANT DEMAND

NORTH AMERICA LUBRICANT DEMAND

UNITED STATES SUPPLY CHAIN DYNAMICS

BASE OIL SUPPLY

SYNTHETIC LUBE DEVELOPMENTS

DISTRIBUTION EVOLUTION

OTHER INFLUENCES

3

How are market dynamics influencing the supply chain?

Customers

Base Stock Producers

Additive Component Suppliers

Package Suppliers

National Oil Companies

Major Blenders

Direct

Distributors

Non-Integrated Blenders

Direct

Distributors

Finished Lubricant Value ChainValueMargin

Nature of relationship

Balance of power

Investors

Internet of things

Role of the OEM

44

How are the margins in the value chain changing?

0

5

10

15

20

25

Crude Oil VGO Gp.II N200 Base Oil LubeBlending/Packaging

Lube Marketing Distributor Margin Retail Margin

Characteristic U.S. Cost and Gross Margin Structure of 5W30 Synblendin 5-quart jugs in Mid-2016

($/Gallon)

Source: Kline

5

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

6

Global lube demand has been essentially flat over the past 10 years, while future growth will be nominal

33% 33% 36% 39% 43% 43% 43% 44% 44% 44%

27% 27% 26% 26% 24% 24% 24% 23% 23% 24%

25% 25% 22% 19% 18% 18% 17% 17% 17% 17%

8% 8% 8% 9% 8% 8% 8% 8% 8% 8%7% 7% 8% 7% 8% 8% 8% 8% 8% 8%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Global Lubricant Demand By Region 2006 - 2015

Asia Pacific N.America Europe S. America Africa & Middle East

CAGR - 0.1%

Market Situation

• Global lubricant market was 39.4 MT (11.7 billion gal) in 2015 and is projected to grow at slightly less than 1%/year, reaching 42.5 MT (12.7 billion gal) by 2024

Global Market

Asia-Pacific accounts for more than 40 % of the total lubricant market and is the fastest growing market mainly due to the growth of end-user

industries in key countries such as China and India

Source: Kline

7

The top 10 countries represented 65% of global lubricants demand in 2015

China7.35 MT

India2.33 MT

Global Market

U.S.7.79 MT

1Japan

1.65 MT

Brazil1.30 MT

South Korea0.95 MT

Indonesia0.89 MT

Canada0.80 MT

Germany0.93 MT

Russia1.65 MT

9

8

5

3

27

4

6

10

8

Globally, industrial oils account for 46% of the market followed by commercial (30%) and consumer (24%)

46%

30%

24%

Market Segments - 39.36 MT(2015)

Industrial

Commercial

Consumer8.1

4.3

3.5

0.9

1.1

5.3

2.3

1.7

1.5

1.0

3.8

2.7

1.4

0.9

0.9

Asia Pacific

North America

Europe

Africa & ME

South America

Global Lubricant MarketBy region, By volume (in MT) 2015

Industrial Commercial Consumer

3.0 MT

3.3 MT

6.6 MT

9.3 MT

17.2 MT

Overview

Global Market

Source: Kline

99

Automotive: Global PCMO demand is forecast to grow from 9.6 MT in 2015 to 10.5 MTby 2024, with SAE OWs and 5Ws combined reaching about 45% of the total

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

0Ws 5Ws 10Ws 15Ws 20/25Ws Other multi Monograde

The global migration to lower viscosity multigrade PCMOs will result in higher penetration of synthetics and semi-synthetics

39% 41% 45%

Global Market

Source: Kline

1010

PCMO visgrade composition varies significantly by region, with 0/5W penetration stillvery low outside the OECD

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

Asi

a-P

acif

ic

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

Euro

pe

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 20240Ws 5Ws 10Ws 15Ws

20/25Ws Other multi Monograde

No

rth

Am

eric

a

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

Sou

th A

mer

ica

Global Market

1111

Global demand for HDMO is forecast to grow from 11.8 MT in 2015 to 13.0 MT by 2024

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

0Ws 5Ws 10Ws 15Ws 20/25Ws Other multi Monograde

30% 28% 24%

Global Market

Source: Kline

Most encouraging for increased synthetic penetration is the shift from monograde to multigradeand, within multigrade, from heavier visgrades like 20/25Ws to lighter grades (15Ws and 10Ws)

1212

Lower visgrade and monograde HDMO demand also varies significantly by region

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

Euro

pe

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

Sou

th A

mer

ica

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

0Ws 5Ws 10Ws 15Ws


Asi

a-P

acif

ic

Global Market

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2019 2024

No

rth

Am

eric

a

13

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

14

North American lube demand is expected to remain stable over the next 10 years

• The 2015 lubricant market was approximately 9.3 MT or $32 billion

North America

Overview

9.5 9.38.6

7.6 7.6 7.7 7.7 7.8 7.8 7.8

0.8 0.80.8

0.7 0.8 0.8 0.8 0.8 0.8 0.8

0.8 0.70.7

0.6 0.6 0.7 0.7 0.7 0.7 0.7

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Demand Pattern Historic 2006 – 2015By Country, By volume (in MT)

United States Canada Mexico

9.0

11.0 10.9

10.1

9.0 9.1 9.2 9.3 9.3 9.3

Vo

lum

e in

MT

Demand may be flat but there are interesting dynamics within that volume

Source: Kline

7.8 7.8 7.8 7.8 7.8

0.8 0.8 0.8 0.8 0.8

0.7 0.7 0.8 0.8 0.8

2016 2018 2020 2022 2024

Demand Forecast 2016 – 2024By Country, By volume (in MT)

United States Canada Mexico

9.39.3 9.3 9.4 9.4

Vo

lum

e in

MT

15

Lube segments remain stable within the overall flat N. American lube market

North America

5.4 5.3 4.9 4.4 4.2 4.2 4.2 4.3 4.3 4.3

2.7 2.72.5

2.1 2.2 2.2 2.3 2.3 2.3 2.3

3.0 2.92.7

2.4 2.6 2.7 2.7 2.7 2.7 2.7

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Demand Pattern Historic 2006 – 2015By Market segment, By volume (in MT)

Industrial Commercial Consumer

9.0

11.1 10.910.1

9.0 9.1 9.2 9.2 9.3 9.3

Vo

lum

ein

MT

46%

25%

29%

Market Segments - 9.3 MT(2015)

Industrial

Commercial

Consumer

Source: Kline

16

The U.S. industrial segment leads on volume, but engine oils lead in value

48%

24%

29%

Volume Share by Product Segment

Industrial

Commercial

Consumer

40%

22%

38%

Value Share by Product Segment

Industrial

Commercial

Consumer

United States

Product % of Total Volume % of Total Value

Engine oils 51 57

Process oils 17 15

General industrial oils* 14 12

Transmission fluids 7 7

Metalworking fluids 7 6

All other fluids 4 3

The industrial market segment consumes the largest volume of lubricants, accounting for an estimated 3.7 MT, valued at $10.9 billion

Use of lubricants by the consumer automotive segment was 1.8 MT, valued at $10.4 billion

The commercial automotive segment is third in both volume and value

*Includes hydraulic fluid, industrial gear oil, turbine and circulating oil, compressor and refrigeration fluid, heat transfer fluid, and other general industrial oils.

17

Automotive: Overall U.S. volumes of PCMO and HDMO are remaining relatively flat through 2024, but the lower viscosity grades are growing

United States

0%

20%

40%

60%

80%

100%

2015 2019 2024

0Ws 5Ws 10Ws 15Ws


2.24 MT 2.17 MT 2.13 MT

PCMO

7.12 7.86 9.030%

20%

40%

60%

80%

100%

2015 2019 2024

0Ws 5Ws 10Ws15Ws 20/25Ws Other multiMonograde

1.83 MT 1.86 MT 1.88 MT

HDMO

Source: Kline

18

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

19

How are market dynamics influencing the supply chain?

Customers

Base Stock Producers

Additive Component Suppliers

Package Suppliers

National Oil Companies

Major Blenders

Direct

Distributors

Non-Integrated Blenders

Direct

Distributors

Finished Lubricant Value ChainValueMargin

Nature of relationship

Balance of power

Investors

Internet of things

Role of the OEM

20

ILMA manufacturers and marketers account for approximately 70% of the U.S. industrial market and 35% of the automotive market

Within automotive lubricants, seven marketers account for ≈65% of the market, while ≈50 marketers compete for the other 35%

Historical U.S. Lubricants Market Size and Share between Majors and ILMAs (Thousand Gallons)

Meanwhile, industrial lubricant applications are more fragmented, allowing more opportunities for differentiation, with nearly 100 active ILMAs

Majors

ExxonMobil Shell BP/Castrol Chevron P66 Valvoline CITGO

United States

0

200

400

600

800

1000

1200

1400

1600

2005 -Auto

2005 -Industrial

2009 -Auto

2009 -Industrial

2013 -Auto

2013 -Industrial

Majors ILMAs Source: Kline

21

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

2222

More than 2 barrels of Group II/III base oil capacity are being added worldwide for every barrel of announced Group I capacity retirements

-60

-40

-20

0

20

40

60

80

2011 2012 2013 2014 2015 2016 2017-2020

Actual and Committed Global Nameplate Base Oil Capacity Additions and Announced Group I Shutdowns (2011-2017)

Group II/III Additions

Group I Shutdowns

‘000B/D

Some 120 KB/D of Group I capacity has been decommissioned from 2010 through 2016, but a further 100 KB/D is “At Risk” from low margins in the future

Base Oil Supply

Source: Kline

2323

Though most of the global new construction boom is now on-stream, sluggish lube demand growth forecasts suggest a slow recovery in base oil plant operating rates

Source: KlineEffective Capacity is Nominal Calendar Day Average (Nameplate Capacity x Group-weighted Stream Factor)

Base Oil Supply

70%

75%

80%

85%

90%

95%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Global Base Oil Effective Capacity Utilization (Global Caputil)

1% CAGR Lube Demand Growth

No Lube Demand Growth

2% CAGR Lube Demand Growth

2424

…illustrated by an analysis of Valvoline’s quarterly financials

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

-2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50

Plot of Quarterly Changes in Valvoline's Per-gallon COGS vs. Quarterly Changes in Per-gallon Gross Margin

Source: Kline

Quarterly Change in COGS

Quarterly Change in Gross Margin

With low crude prices and weak base oil margins, the downstream lubricants business will continue to enjoy above-average profitability…

Base Oil Supply

2525

Key takeaways from the base oil analysis…

Crude Oil Prices

• Crude oil prices are both unpredictable and volatile

• The current Brent forward strip for end-2020 is $60/Bbl

• DOE’s September 2016 Annual Energy Outlook projects Brent at nearly $85/Bbl in 2020….the basis differential vs. the forward strip suggests a hedging program is likely to be profitable

Base Oil Prices

• Higher crude prices mean higher base oil prices

• Continuing overcapacity will continue to depress base oil cash margins

• Low-viscosity stocks vulnerable to price weakness,

• Net result is that lube blenders are likely to have to absorb only increases in crude oil prices, as base oil margins over crude remain depressed and competition between suppliers get even tougher

Finished Lube Prices

• These are affected by changing consumption patterns and channels (the decline of fast lubes?)

• Weakness in upstream costs and margins suggests a continuing favorable COGS environment for blenders and marketers, barring a major oil catastrophe

Base Oil Supply

26

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

2727

OEM

technical demand

Environmental/regulatory

Operating cost optimization

Increased use of higher quality level lubricants in automotive applications

Increased use of industrial lubes with better AO, AW, and EP performance

Abundant high performance basestocks

(Group II, III, now III+)

SUPPLY PUSH

DEMAND PULL

Demand for high performance, quality lubricants is expected to accelerate in bothdeveloped and developing countries

Finished Lube Developments

2828

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Corvette Camry Accord Corvette Camry Accord

2011 2012 2013

OEM technical demand from volume/mass market OEMs is rapidly changing the factoryand service fill landscape, creating opportunities for lubricant suppliers to sell synthetics

U.S. Production (Factory fill) U.S. Sales (Service fill)

# Units

1.6 KT

2.1 KT3.7 KT

3.3 KT


Source: Kline

2929

However, the synthetic PCMO space is no longer the domain of the global majors

Supplier Synthetic Premium-Synthetic

Shell Pennzoil Platinum Pennzoil Ultra Platinum

ExxonMobil Mobil Super Synthetic Mobil 1 EP

BP Castrol Magnatec Castrol Edge

Calumet Royal Purple Synthetic Royal Purple HPS

Amsoil XL Extended Life Synthetic Signature Series Synthetic

Total Active Synthetic Quartz Synthetic

Fuchs Titan Super Syn Titan Super Syn Longlife

GS Caltex KIXX New, G1, Gold SL KIXX PAO, PAO 1

Liqui Moly Molygen Synthoil Energy

Valvoline SynPower -

Shell QS Ultimate Durability -

Phillips 66 Kendall GT-1 Full Synthetic -

Chevron Havoline Synthetic -

Indian Oil Servo Futura Synth -

Sinopec Sinopec SM Engine Oil -

PetroChina KunLun Tianyuan -

Ford Motorcraft Full Synthetic (s/s) -

Toyota Toyota Synthetic -

Honda Honda Synthetic -

Subaru Subaru Synthetic -

Chrysler/Fiat Mopar Synthetic -

General Motors dexos 1 (s/s) -

NAPA NAPA Synthetic -

Walmart SuperTech Synthetic -

O’Reilly Auto Parts O’Reilly Synthetic -

Advance Auto Parts Advance Synthetic -

RelaDyne DuraMAX Synthetic (s/s) -

OEM-GPO

RETAIL

“BIG 3”

DISTRIBUTOR

NOCs


3030Source: Kline

$/Gallon

-

10

20

30

40

50

60

Re

d L

ine

Am

soil

Luca

s O

il

Ro

yal…

Pe

nn

zoil

Am

soil

Mo

bil

Pe

nn

zoil

Val

volin

e

Am

soil

Qu

aker

…

O'R

eilly

She

ll

Luca

s O

il

Cas

tro

l

Ch

evr

on

Ke

nd

all

O'R

eilly

Sure

gard

Val

volin

e

Pe

nn

zoil

Tru

Sou

th

Val

volin

e

Pe

tro

Ca…

Cas

tro

l

Ch

evr

on

She

ll

Qu

aker

…

Mo

torc

r…

Ke

nd

all

Sun

oco

Mo

bil

Gu

ard

Plu

s

Tru

Sou

th 76

She

ll

Sun

oco

Sun

oco

Co

asta

l

Gu

ard

plu

s

Sup

er S

Un

bra

n…

U.S. Per-gallon Pricing of 55-Gallon Drums of 5W30 PCMO Lubricants (based on May, 2014 Distributor Sales Prices)

Generic "Synthetics"

PAO-BasedFull Synthetics

Group V-BasedFull Synthetics

Semi-Synthetics and Synblends

Commodity and Fighting Mineral Brands

The difference in market pricing of the retail synthetic PCMO products can be linked to the base fluids used, driven by their formulation properties and brand positioning


31

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

32

Almost 50% of U.S. blended lubricants are sold directly to the end user

U.S. Lubes Distribution

Auto Parts Stores4%

Direct 47%

Distributors45%

Mass Merchandisers4%

4 key categories: major oil companies, large specialty manufacturers, small specialty firms, and distributors

Generally process oils, industrial engine oils, and metalworking fluids tend to be marketed directly to the end user

Industrial lubricants

Lubricants sold through direct channels accounts for an estimated 30%

Distributor sales 42% Mass merchandisers 13% Auto parts stores 14%

Consumer automotive lubricants

Sales through distributors and jobbers account for an estimated 67% of total sales

Direct sales accounts for only 33% of the total sales

Commercial automotive lubricants

Distribution Evolution

3333

Distributor M&A consolidation is best illustrated by PetroChoice, Reladyne and Brenntag, which have grown to control a significant amount of lube distribution in the U.S.

~500-600 KTBranded + Private Label

FlyersPilot Thomas

Logistics

Pilot Thomas Logistics

RelaDyne

Brenntag(J.A.M.)

RelaDyneRelaDyne & PetroChoice

PetroChoice

PetroChoice

RelaDyne

GH Berlin Windward

Brenntag

(G.H. Berlin-Windward)PetroChoice

Acquired from Greenbriar Equity by Golden Gate Capital in December 2015Acquires Universal Lubricants in May 2016

Brenntag

Acquires GH Berlin-Windward and J.A.M. Distributing in November 2015Acquires lubes division of NOCO Distribution in October 2016

RelaDyne

AEA Investors LP sold to Audax PE in July 2016Acquires Parker Oil, Hollingsworth Oil, and Cardwell Distributingin 2016


3434

• BP

• CAM2

• ExxonMobil

• JAX

• Lubriplate/Fiske Bros.

• Petro-Canada

• Phillips 66

• Safety-Kleen

• Shell

• Valvoline

• Choice Lubricants (PL)

• BioBlend

• BP

• Chevron

• ExxonMobil

• Ford/Motorcraft

• Houghton

• Idemitsu

• Petro-Canada

• Phillips 66

• Shell

• Summit Industrial

• Valvoline

• NaviGuard (PL)

• BioBlend

• Chevron

• Phillips 66

• Shell


• Valvoline

• DuraMAX (PL)

• ALLFLEET (PL)

• RelaTECH (PL)

• Mechanic’s Pride (PL)

• ArmorTrac (PL)

• CITGO

• ExxonMobil

• Phillips 66

• Shell


• SPX Formula (PL)

These leading distributors employ a multi-brand strategy to supply the automotive andindustrial customer base in their respective sales territories


3535

Few U.S. distributors have partnered with the PE world or embarked on aggressive M&Aactivities, with many operating as independent regional businesses….but for how long?

Circle Lubricants

Grade A Petroleum

MetroLube

PWD Lubricants

PPC Lubricants

Lyden Oil Company

Yoder Oil Company

PrimeLube

Valvoline ExxonMobil Petro-Canada Safety-Kleen Super Clean (PL)

Phillips 66 Warren Oil Co. ALS ARG

Phillips 66 BP CAM2 Bio Blend

Valvoline Phillips 66 Total Safety Kleen ServicePro

Chevron ExxonMobil BP CAM2 Amsoil JAX Houghton Bio Blend Prime Plus (PL)

Shell BP ENI Safety-Kleen Warren Dist.

Valvoline Phillips 66 CITGO/Mystik Summit Industrial Bio Blend Clarion Lubricants

CITGO Ford/Motorcraft Gulf Oil Phillips 66 Lubriplate/Fiske Blue Star ProGuard (PL)

All follow a multi-brand strategy Some with private label Some with ILMAs in the value position


36

Lube distributors (large and small) afford lube manufacturers supply coverage across awide swath of territory, along with many other efficiencies…

Distributor Brand

Strategy

• How do you change their mind set and move them to a branded offering?

• Have market development and customer perceptions narrowed/eliminated the advantage that branded has long enjoyed?

• How knowledgeable and enthusiastic can the sales rep be about all aspects of your product and service offerings if he/she also has to be equally competent on the other two to five brands?


37

…but does your brand have the consumer loyalty, awareness, and equity thattranslates into sufficient pull-through for the distributor?

• Multiple warehouse points across multiple states, means lube manufacturers can be confident that its national account business will be reliably served and represented and poised for growth.

• National account business has evolved into a strong hook for both parties.

• If you are skewed more towards national accounts, you should not be surprised if your brand ranks lower on the distributor pecking order compared to your competition

Manufacturers’ National Account Strategy


38

Contents




BASE OIL SUPPLY



OTHER INFLUENCES

39

Advancements in technology will have a large impact in the industry in the future

What does digital mean for the lube industry now and going forward?

What is the impact of digital on the key consuming industries and, as a result, on the lube value chain

Who will need to be targeted to sell lubes? (buyers and influencers)

How will marketing (in its broad sense), communication and sales need to evolve?

Other Influences

How will the essence of lubrication evolve based on the future of end-use industries in

the context of “digital”?

Who will be choosing, purchasing and using the lubes, and what the decision making

process be like?

How can lube companies (1) build relationships and

influence decision makers? (2) compete effectively?

40

In Summary…

• Overall lubricant volume is growing marginally

• Lower visgrades are growing significantly more, but higher grades are diminishing

• Portfolio management is key to ensure it is resilient enough

• Margins are good for finished blenders right now

• Distributor strategy is key, but may be somewhat unpredictable based on consolidation and acquisition outside of your control

• Looking to the future, technology developments need to be considered with the OEM taking a bigger role in the industry supply chain

GLOBAL HEADQUARTERS

Kline35 Waterview Blvd.Suite 305Parsippany, NJ 07054Phone: +1-973-435-6262Fax: +1-973-435-6291

ANNIE JARQUIN

Director, Energy

t. +44 (0)7470-211-225

e. [email protected]

Kline is a worldwide consulting and research firm dedicated to providing the kind of insight and knowledge that helps companies find a clear path to success. The firm has served the management consulting and market research needs of organizations in the agrochemicals, chemicals, materials, energy, life sciences, and consumer products industries for over 50 years. For more information, visit www.KlineGroup.com.

www.klinegroup.com

ILMA Annual Meeting · Market Situation • Global lubricant market was 39.4 MT (11.7 billion gal)...

Documents

Transcript of ILMA Annual Meeting · Market Situation • Global lubricant market was 39.4 MT (11.7 billion gal)...