Following the premier article in Kline’s series on the impact of COVID-19 (C-19), written by Ian Moncrieff and Milind Phadke and published on March 31, this installment will address how the C-19 pandemic will impact the demand for automotive and industrial lubricants in 2020 by sector and offer three scenarios based on the full/partial lockdown of many segments of the U.S. economy. Recognizing that this is a moving target and policy changes often occur daily, if not hourly, scenario outcomes will be updated accordingly.
The United States is the largest lubricants-consuming country, accounting for 20% of total global lubricants demand, and 84% of total North America demand in 2019. China follows at 18% of global and 42% of total Asia-Pacific demand. Given the combined size of these two country markets, any disruption in the normal operation of the lubricants industry in either country can have serious implications for lubricants suppliers, distributors, B2B/B2C end users, basestocks, and additives suppliers.
The United States consumes more than 8.0 million tonnes (MT) of automotive and industrial lubricants annually and, pre-C-19, is forecast for no overall volumetric growth over the next 10 years. There are many reasons for this despite, for example, a vibrant economy, low unemployment, GDP growth, solid new vehicle sales rates, and a dynamic manufacturing base. Rising penetration of synthetics and premium-quality products enable longer drain intervals, reduced downtime, efficiency improvements, and adoption of low-viscosity grade automotive engine oils. Combined, alternative power generation, growth in the penetration of electric vehicles, advanced vehicle powertrains and industrial machinery, and better maintenance practices supported by technology, Industry 4.0, and IoT, among others, suppress volumetric demand while delivering revenue growth to the industry.
In order to quantitatively assess the impact of C-19 on volumetric lubricants demand in 2020, Kline’s thinking is that C-19 will impact each individual market segment and sector differently and, as such, each sector’s ability to function as close to 100% of normal capacity as possible in 2020.
Kline’s analysis looks at essentially four stages of C-19:
- Stage 1 or Pre-crisis
- Stage 2 or Lock-down
- Stage 3 or Recovery
- Stage 4 or Post-Crisis
Depending on the duration in terms of number of weeks for Stage 2, and whether or not the market in Stage 4 reverts back to 100% of normal lube consumption, we are able to produce three different scenarios which provide a view of the volumetric decline in U.S. automotive and industrial lubricants that can be expected in 2020 compared to 2019.
For example, in many parts of the United States, the franchised workshop (FWS) or new car dealership sector is operating under government regulations that severely restrict the retail side or vehicle sales business, while the service side is still deemed as an essential business and remains open to the public. Given the stay-at-home guidelines including business and personal/leisure travel restrictions imposed on the general public at least through April 30, vehicle usage is severely hampered, resulting in less demand for motor fuels and less demand for routine maintenance including lube, oil, and filter changes. Therefore, the passenger vehicle lubricants (PVL) demand for a typical service side of an FWS operating throughout the four stages of C-19 in 2020 will contract, as the sector is not operating at normal levels.
Based on Kline’s understanding of the dynamics of each automotive and industrial sector, we are able to estimate the negative impact of C-19 on operating levels for each of the 35 sectors combined that consume automotive and industrial lubricants in the United States and, as such, offer three different scenarios for volume losses for CY 2020.
Passenger Vehicle Lubricants
The United States is primarily a do-it-for-me market, with quick lubes as its leading sector, accounting for 26% of total U.S. PVL demand, followed by FWS at 23%.
Est. U.S. PVL Stage 2 Operating Levels by Sector, 2020
The quick lubes sector is represented by national and regional company owned-operated and franchised locations operating under such familiar names as Jiffy Lube, Valvoline Instant Oil Change, and Take 5 Oil Change, along with privately owned, single-site local neighborhood locations across the country. While still operational and deemed as essential businesses offering services important to the economy and general public, these eight PVL sectors are all operating under similar and different conditions and are therefore operating at below normal 100% consumption levels based on Kline’s assumptions. Moreover, given the stay-at-home guidelines and reduced vehicle usage, the number of daily lube, oil, and filter changes performed by installers is a fraction of normal levels; retail sales of lubricants for do-it-yourselfers and commercial sales by retailers to installers is equally depressed.
The FWS sector is doing whatever it can to keep service bays operating and the business generating revenue despite the shuttered showrooms and few, if any, new vehicles being sold during C-19 Stage 2. Examples include modifying business hours to accommodate customers, vehicle pick-up and drop-off concierge services, expanded use of social media, collaboration with local chambers of commerce, servicing all makes and models, and even such unique promotions as a free roll of toilet paper with a regular oil change.
Overall, based on Kline’s assumptions of market conditions, the U.S. PVL market segment and its component sectors combined are operating at <50% of their pre-crisis, normal consumption level due to C-19. From calculations for Scenarios #1, #2, and #3 based on the number of weeks for Stage 2 and the rate of post-crisis recovery, Kline expects PVL lubricant demand to contract at between 15%-24% in 2020. On a volume basis, potential losses ranging from 300 kilotonnes (KT) to 525 KT can be expected.
Commercial Vehicle Lubricants
The U.S. market for commercial vehicle lubricants (CVL) is nearly evenly split overall into sectors that operate vehicles and equipment in On-Highway and Off-Highway applications. While the current factors impacting the PVL segment exist in the CVL segment, e.g. stay-at-home guidelines, fleets and trucking companies operating both nationally and regionally are still open for business and deemed as essential businesses providing everyday and critical products to anxious consumers. Moreover, while fleets are enduring the same staffing issues as FWS and quick lubes, these businesses are expected to maintain, as close as possible, their normal consumption levels.
Est. U.S. CVL Stage 2 Operating Levels by Sector, 2020
The for-hire fleets sector, which accounts for 23% of total U.S. PVL demand, includes large truckload (TL) companies such as Stevens Transport, less-than-truckload (LTL) companies such as Old Dominion, and equally important, owner-operators shipping products coast-to-coast and to local communities still operating trucks and equipment. Given the immediate need for medical equipment and supplies to combat C-19, it’s critical for the for-hire fleets sector to continue to maintain normal preventive maintenance (PM) schedules/programs of its vehicles and perhaps even reduce oil drain intervals to ensure the vehicles avoid any unplanned downtime. As such, Kline expects that the for-hire fleets sector is operating at >75% of its normal, pre-crisis consumption level and demand for heavy-duty motor oil (HDMO) and other CVL lubricants will remain strong during 2020.
Lubricants suppliers seeking to solidify their supply relationships with this critical CVL sector should review their product and service portfolio to ensure that customers are gaining maximum advantage to realize sustainable and reliable up-time operation of their entire fleet.
The lease-rental sector has many dimensions, from providing leased equipment to construction companies, offering rental vehicles to business and leisure travelers at airport locations, and leasing H-D vehicles used by for-hire and private fleets. Given the impact of C-19, each of these sub-sectors is under different stress factors and combined, based on Kline’s assessment, the lease-rental sector overall is operating at between 50%-74% of its normal level.
For lubricants suppliers seeking to assess and prioritize how best to serve this sector, Kline suggests targeting the companies that lease vehicles and equipment and offer PM service to over-the-road (OTR) trucking fleets and, similar to the for-hire fleets sector, ensure their entire product and service offering is delivering maximum value to the leasing company and, in turn, its customers.
The transportation sector is experiencing reduced demand for its services provided by, for example, tour bus operators, school bus operators, and ride sharing/hailing providers due to mandatory stay-at-home guidelines, school closures, and reduced business travel and leisure activities. Given these factors, Kline expects the sector is operating at <50% of its normal consumption level.
Agriculture is the largest CVL consuming sector in the United States at 27% of the total and an important contributor to the health and sustainability of the overall U.S. economy. Despite all the negative factors associated with C-19, the nation’s farming industry must operate at normal levels, as seasonal preparation, planting, and harvesting activities cannot be delayed, postponed, or compromised. As such, the expectation is that mobile and stationary farming vehicles, machinery, and equipment must still be maintained according to existing OEM and owner-operator PM schedules to ensure reliable and continuous operating rates throughout the four stages of C-19. Kline’s assessment of the agriculture sector is that it is operating at a near-normal consumption level of >75% and will continue to demand CVL products such as HDMO and tractor hydraulic fluid, among other products and services from suppliers.
Overall, based on Kline’s assumptions of market conditions, the U.S. CVL market segment and its component sectors combined are operating closer to the high end of between 50%-74% of their normal level due to C-19. From calculations for scenarios #1, #2, and #3 based on the number of weeks for Stage 2 and the rate of post-crisis recovery, Kline expects CVL lubricant demand to contract at between 7% and 14% in 2020. At-risk volume losses range from 130 KT to 260 KT for CY 2020.
Including process oil, industrial lubricants (IND) demand among the 17 industry sectors researched by Kline accounts for >50% of the over 8.0MT U.S. finished lubricants market. The first three sectors combined account for nearly half of the total IND consumption in the United States and provide critical key components and final products supporting the entire U.S. industrial and automotive economy.
Est. U.S. IND Stage 2 Operating Levels by Sector, 2020
Announcements from all of the major passenger vehicle OEMs about plant closures and employee furloughs have resulted in the transportation equipment manufacturing sector significantly reducing its demand for rubber tires and related products, ferrous and non-ferrous material, and fabricated metal products; this negatively impacts the sectors producing and delivering these key components. As such, IND demand contraction is spread across many sectors, some able to absorb the loss, others unable.
However, due to the diverse products produced in each sector and their respective reach, some sectors are able and expected to operate at near-normal operating rates despite the impact of C-19. For example, the medical and healthcare industry is under intense pressure to deal with the exponential growth in patients requiring medical attention for C-19 and, as such, needs an uninterrupted inventory of protective clothing and medical machinery and equipment, among other related products. Therefore, while rubber tire demand is in decline, the rubber and plastic products sector must continue to operate and supply the components and final products to manufacture these critical healthcare products.
Output of the chemicals and allied products sector, which includes building blocks, components, and ingredients far-reaching into nearly every final product required for our economy to function, is an essential sector and must continue to operate at near-normal rates despite the disruptions caused by C-19. Likewise, electrical equipment and energy transmission, the power generation backbone of the United States, cannot undergo any significant and extended supply interruptions. These three sectors have a strong product demand for process oil including medical grade white oil, synthetic hydraulic fluid, turbine oil, and natural gas engine oil, among many others. As such, based on Kline’s assessment, these sectors are operating at near-normal levels.
The food processing sector, which accounts for <2% of total IND demand, is a critical industrial sector with manufacturers and suppliers expected to operate at near-normal levels to keep the food pipeline full and retail shelves of the nation’s grocers fully stocked. This sector is unique in that it requires general-purpose industrial oils and fluids as well as specialty, food-grade synthetics such as gear oil, grease, and compressor fluid.
Lubricants suppliers to this important sector should review their entire product and service portfolio to ensure that it meets the needs of the sector and delivers maximum value, equipment efficiency, and up-time.
Overall, based on Kline’s assumptions of market conditions, the U.S. IND market segment and its component sectors combined are operating closer to the high end of between 50%-74% of their normal, pre-crisis consumption level due to C-19. From calculations for scenarios #1, #2, and #3 based on the number of weeks for Stage 2 and the rate of post-crisis recovery, Kline expects IND demand to contract at between 8% to 15% in 2020. Volumetrically, between 340 KT to 675 KT is at risk for loss in CY 2020.
At the beginning of 2020 and pre-C-19, Kline’s forecast for the U.S. PVL, CVL, and IND lubricants industry was no overall volumetric growth. As a result of Kline’s industry knowledge and its evolving analysis of the C-19 pandemic using a proprietary four-stage impact and three-scenario modeling assessment for each automotive and industrial lubricants consuming sector, we estimate an overall volumetric decline of between 10% and 17%. This represents losses of 0.8 MT to 1.4 MT, depending on the depth and duration of the C-19 pandemic in the United States.
Estimated U.S. Finished Lubricants Demand Growth, 2019 to 2020
Despite the negative impact of C-19 on the U.S. economy and the lubricants industry, recovery will come. Post-crisis, the market will settle to some degree of normalcy, and industry fundamentals that were in place pre-C-19 will return to drive the market. Until such time, the U.S. lubricants industry must operate during 2020 under a period of uncertainty and endure unprecedented volume declines, rising unemployment, social distancing, stay-at-home guidelines, and business closings not seen in past financial and economic crises.
Post C-19, lubricants suppliers should focus on individual sectors, not the entire market, and monitor these leading industry fundamentals for value and growth opportunities:
- Synthetics penetration in automotive and industrial lubricants will continue to grow driven by OEM technical demand and end user acceptance.
- Government and industry regulations for reductions in automotive emissions and improvement in fuel economy continue.
- OEM and end-user demand and acceptance for extended oil drain intervals continue.
- Operating efficiency gains in industrial machinery and equipment will be supported and enabled by synthetics, technology, and more diligent and measured maintenance practices.
- EVs will continue to penetrate the market and displace ICEs and offer opportunities in alternative and specialty oils and fluids.
In the next installment of the Kline Energy Practice’s analysis of the impact of COVID-19 on the global lubricants industry, we will be presenting our insight and perspective on India's finished lubricants industry.
George Morvey is an Industry Manager in the Market Research division of Kline’s Energy Practice. He is based in its Parsippany, New Jersey headquarters office.