Walking a Tight Rope to Recovery: U.S. Industrial Oils and Fluids Demand
by Pooja Sharma, Project Manager, Kline Energy
September 10, 2020
The manufacturing sector in the United States accounts for a shrinking share of the U.S. economy, a fact that is much rued by observers. The upheaval caused by COVID-19 has been a bitter pill to swallow for many manufacturers, who are now evaluating questions such as: How has U.S. manufacturing been impacted in 2020, and what will be the implications of the current situation in the short-term future? How will this impact the market for lubricants, base oils, and additives? Kline & Company recently completed an in-depth report on the industrial sector of the United States, deep-diving into the top 16 end-use industries in the country that consume lubricating industrial oils and fluids. The study unveils interesting trends that different industrial segments are undergoing in 2020 and the extent of their impact on demand for industrial oils and fluids in the future leading to 2024.
The Great Lockdown crisis of 2020 has impacted different segments of the U.S. industry disproportionately, with some industries experiencing sharper declines than others. The industries that cater to the market with “essential” goods and services continued to operate without much interruption during the lockdown period and performed relatively better than other industries that had hard stops. In all, industrial activity in the United States experienced a profound drop during the first half of 2020, with the average industrial capacity utilization rate plunging to 64%-65% in the months of April and March, from 75% in February. Manufacturing segment capacity utilization rates experienced the most significant decline, dropping to 60%-62% in April and May, dipping even lower than the levels of the year 2009, when the U.S. economy was hit by a severe recession. The consumption of industrial oils and fluids, which typically tracks the level of activity in key industrial segments, is also expected to follow suit.
Drop in Average U.S. Industrial Capacity Utilization Rates in 2020
Source: U.S. Federal Reserve Database
2020: An uphill battle for manufacturing industries
Leading oils- and fluids-consuming manufacturing industries in the United States, such as rubber and plastic products, transportation equipment, primary metals, and machinery, experienced a drastic drop in operating rates during the first half of 2020 due to the lockdown directives, social distancing measures, and a contraction in demand. Rubber and plastic products, plus the transportation equipment manufacturing industries, are largely dependent on growth in the automotive market. Growing sales of light trucks, utility vehicles, and commercial trucks have been driving demand for tires, plastic parts, and automotive components in the United States. Some 70%-80% of U.S. styrene-butadiene rubber (SBR) demand, which is the largest commodity elastomer consumed in the country, originates from automotive tire manufacturing. The demand for thermoplastic fabricated products and automotive equipment, such as engine parts, electronics, suspension components, and transmissions, has also remained stable, driven by the transportation equipment manufacturing industry in the country.
However, this changed in 2020, as the COVID-19 outbreak put production facilities on complete or partial halts. Production facilities of the top automotive OEMs in the United States, such as General Motors Co., Ford Motor Co., and Fiat Chrysler Automobiles, remained temporarily closed in March/April 2020 and began operations only by May 2020. Foreseeing reduced consumer demand, some OEMs even switched their production facilities to making medical equipment and devices such as ventilators and face shields. Although the path to recovery is still not visible, industry experts believe that full automotive production will be resumed toward the end of 2020 or early 2021 as the pandemic comes under control. Even as operations are resumed, automotive OEMs will have a full plate of market complexities to manage, such as financial weakness, supply-chain constraints, and reduced consumer demand.
Weakness in U.S. automotive manufacturing is likely to spill over into related industries, such as tire/plastics, thereby translating into a decline in demand for industrial oils and fluids that are used in these industries. Rubber process oils, used in SBR tire formulations, are anticipated to experience a significant decline in demand in 2020 due to a slowdown in tire manufacturing. Beyond 2020, the tire manufacturing industry is forecast to experience growth due to improvement in automotive production rates. Another important trend that will act in favor of tire production growth in the United States is reduced imports of Chinese tires due to intensifying U.S.-China trade restrictions. In the wake of decreasing Chinese tire imports, domestic tire manufacturers have planned capacity expansions, which are expected to bring new production capacities onstream. Continental AG and Nokian Tyres have already completed the construction of their new production facilities in Mississippi and Tennessee, respectively, and have announced plans to start the production of bus, truck, and passenger car tires at these facilities by the end of 2020. Another tire manufacturer, Toyo Tires, has also announced plans to increase its light truck tire production. Growth in tire production capacity, driven by recovery in tire usage in various segments, is expected to foster growth in demand for rubber process oils in the United States in the near future.
The transportation equipment manufacturing industry in the United States, which was already experiencing declining demand from the passenger car segment during pre-COVID months, is now also experiencing a sharp decline in demand from the commercial vehicles segment. The transportation equipment manufacturing industry is viewed as a forerunner for best industry practices for lubricant handling such as fluid conservation and disposal, improved/innovative maintenance of fluids, and chemical management services (CMS). Fast adoption of top-quality synthetic and semi-synthetic fluids to run sophisticated machinery and precision equipment in this industry necessitate the employment of best fluid management practices. This trend is particularly noticeable for metalworking fluids, which account for more than half of the total oils and fluids demand in transportation equipment manufacturing. The demand for synthetic hydroforming lubricants and semi-synthetic cutting fluids is on the rise in this industry, and these high-value fluids are best managed via chemical management systems offered by metalworking fluid suppliers.
Metalworking fluid consumers in the primary metals and machinery manufacturing industries are exhibiting similar trends toward synthetic fluids, albeit at a slower rate. In addition to cost optimization and efficiency enhancement, these industries are driven by the environment, health, and safety considerations, where synthetic and semi-synthetic metalworking fluids win over conventional fluids. The penetration of synthetic general industrial oils, such as water glycol, phosphate ester, and invert emulsion-based hydraulic fluids, is lower in comparison to metalworking fluids due to cost. Gradually increasing penetration of synthetic fluids and better fluid management systems in metals and machinery manufacturing industries have resulted in the scaling back of lubricant demand, even before the COVID-19 outbreak. The deep recession in 2020 and sharp cuts in manufacturing output during the year are anticipated to further cut back the appetite for industrial oils and fluids by these industries.
In fact, demand for industrial oils and fluids in nearly all of these top industries in the United States has remained flat or has been decreasing in the wake of better fluid management and the use of sturdy products with longer service lives. The Great Lockdown recession in 2020 is anticipated to steepen the declines in most of the end-use industries. The economic slowdown in the country is anticipated to impact production output, disrupt supply chains and markets, and have a depreciative impact on firms and financial markets. Another factor that may potentially have a negative impact on industrial productivity in the United States is the ongoing U.S.-China trade war. Unfavorable trade tariffs may reduce exports of goods from the United States as well as imports of raw material from China, thus affecting manufacturing industries.
The year 2020 also saw a drastic decline in global crude oil prices, which dropped by nearly 30% in April. Due to the lockdowns in the United States and other key economies, demand for crude oil dried up in an already existing oversupply situation, rendering global crude oil prices low. Low crude oil prices will negatively affect the oil and gas industry in the United States, particularly by making shale gas extraction economically unviable. This will have a negative impact on demand for lubricants that are used in oil and gas extraction and petroleum refining. Lower crude oil prices are also poised to reduce oil production activity globally, affecting the demand for export-targeted oil field equipment from the United States.
Estimated Demand for Industrial Oils and Fluids by Key U.S. End-Use Industries in 2019 and 2024
Source: Kline & Company
All is not ill-fated
All, however, is not ill-fated. Some select end-use industries in the United States have been able to keep their heads above the water during the 2020 turmoil. These include food processing, electricity generation and transmission, and chemicals and allied products. These industries are seeing less-severe repercussions of the pandemic since the nature of products/services supplied by them are considered “essential.” Over the next five years, demand for industrial oils and fluids in these end-use industries is forecast to remain flat or decline at slower rates relative to other end-use industries in the country.
The food processing industry is least impacted by the current turmoil, as food is a necessity. In fact, certain food products may even see growth in the short term. For example, nutrient-fortified products and plant-based meat and milk are two areas that are expected to grow over the nextfive years. Demand for lubricants from this industry is thus expected to remain flat, despite the growing penetration of synthetic oils that offset volumetric gains. Major factors that will have a positive impact on the lubricants demand in the food processing sector include population growth, the growing trend of single households, and the growth of new fortified food and beverages products with immunity-boosting characteristics.
The electrical equipment and energy transmission industries, which continued to operate during the lockdown period, experienced less severe declines. This industry closely follows the overall industrial and commercial segments in the United States and is expected to recover at the pace of these segments. The chemicals and allied products manufacturing industry is forecast to experience only a marginal decline in 2020, supported by the spike in demand for packaging, pharmaceuticals, medical equipment, and personal care products and cleaning compounds such as hand sanitizers, antibacterial hand gels, and liquid soaps. Despite a marginal decline in 2020 and a recovery in 2021 and 2022, overall demand for industrial oils and fluids by these industries may not achieve 2019 levels due to the depth of the recession in 2020.
What will be lost while walking a tight rope to recovery?
The U.S. economy, which experienced GDP growth in the range of 2.0% to 2.9% between 2014 and 2019, is destined to experience its steepest recession in almost a century, plunging by 8.0% in 2020 as per International Monetary Fund’s (IMF) latest report. The year saw a near halt of industrial activity, a severe drop in demand, and resulting financial weakness.
The massive downturn that the U.S. industrial segment is experiencing in 2020 will have significant repercussions on the lubricants industry. The first half of the year 2020 saw abrupt and large-scale halting or curtailing of industrial activity, resulting in the total industrial productivity (IP index) plunging by 12.8% in April and manufacturing productivity plunging by a whopping 16% over 2019’s average. This resulted in a sudden drop in demand for lubricating oils and fluids in the U.S. industrial sector, and it is estimated that this market will drop by nearly 12%of the demand volume in 2019.
Source: Kline & Company, U.S. Federal Reserve Database, and International Monetary Fund (IMF)
The U.S. industrial sector is beginning to show signs of recovery, with the industrial production index growing month-on-month by 5.7% and 3% during June and July 2020. Industry participants are still likely to face several impediments in recovery, such as weak demand and financial issues. As the end-use industries walk the tight rope to recovery, Kline estimates that volumetric demand for industrial oils and fluids in the United States will bounce back to a partial recovery in 2021 and will then show growing signs of recovery in the coming years. This is based on the assumption that the development of a vaccine or treatment for COVID-19 will invigorate businesses back to normalcy. This recovery, nonetheless, will be dampened by other incidental trends such as better fluid management and housekeeping practices, coupled with gradually growing penetration of higher quality synthetic fluids. These trends will be strong enough to dampen volumetric growth in industrial oils and fluids during the next five years, keeping demand in 2024 well below 2019 levels.
This article draws insights from Kline's recently published study: Opportunities in Lubricants: North American Market Analysis (Industrial Oils & Fluids edition), which includes an analysis of Impact of COVID-19 on general industrial oils, metalworking, process oils, and industrial engine oils markets.
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