Why the Third Round of Price Increases?

 

Why the Third Round of Price Increases?

PIC11142017Rev2Price increases are not unusual in the lubricants business. In fact, this year alone we have seen three rounds. In most cases the increases are somewhat predictable since they are often driven by changes in the price of base oil. This is logical since base oil accounts for about 85% of the volume of material in motor oil and roughly 50 to 60% of its cost. The balance of the cost of goods belongs to performance additives, which are also impacted by higher base oil prices.

With that as a backdrop, the current round of price increases are understandable since there has been close to a 4% increase in the price of base oils since the start of the second round of price increases in April of this year. In addition, Lubrizol announced a temporary surcharge for its additives from September 27 through December 31, 2017 due the events surrounding Hurricane Harvey and the impact on the infrastructure of the petrochemical industry.

There are, however, other factors taken into consideration when price increases push through on finished lubricants; some having a very important impact on the third round of price increases. One in particular is the cost of freight.

Truck11142017The cost of freight climbed significantly this year due to a number of issues. The one with the greatest effect has, and is expected to continue to be, a severe shortage of qualified drivers. According to a report by the American Trucking Association (ATA), the driver shortfall may reach 50,000 positions by the close of 2017. Further, if the current trajectory holds, it’s forecast to balloon to nearly 175 thousand by 2026. Trucking companies are working to address the shortages by offering hefty sign on bonuses, higher compensation, and other perks and benefits to gain and retain drivers. In addition, they are pouring money into recruitment and training programs, all of which are driving up the cost of freight.

Freight costs are also ramping up due to regulations. In particular, the preparation trucking companies are implementing to assure compliance to the new federal regulation that requires the use of electronic logging devices (ELDs). In short, ELDs are digital logging devices that monitor driver hours of operation and help assure drivers adhere to the hours-of-service regulations (limits on the number of hours they can drive). In addition to the expense of planning, and the hardware and software required to implement ELDs, the regulations are said to exacerbate driver shortages by reducing availability.

Another impact on shipping costs, brings us back to August, when JobbersWorld reported on CSX Rail (the country’s third largest railroad) restructuring to rationalize infrastructure and consolidate operations. With this, CSX made regional cut backs in personnel and hump tracks, bringing its ability to handle between 60 and 80 cars a day in some yards, to as few as 35 or even 15 cars a day. Adding to the cut backs, CSX has also changed some of the shipping patterns, which sends some cars north before heading south, adding to delays. These factors encouraged blenders, distributors and others to find an alternative, yet more expensive and/or time consuming, means of transporting necessary products.

Importantly, increases in the cost of shipping impacts both the inbound and outbound freight charges incurred by lubricant blenders and distributors. As an example, higher freight costs mean blenders pay more to transport base oils from the rack to the blender’s lube plant. In addition, the freight costs to bring in additives increased. Distributors also pay more on inbound freight to transport finished lubricants from the blend plant to their storage and distribution facilities. On outbound freight, both blenders and distributors can incur higher shipping costs (when not FOB) to move finished lubricants from their warehouses to the end-user, retailer, or installer. And make no mistake about it, although a marketer operating a private fleet may not share the same cost burden as those moving freight by common carrier, costs can also increase as they compete to hire and retain drivers in the shrinking pool of qualified professionals. Furthermore, they too are seeing higher costs due to more stringent regulations.

But there is more.

bottles11142017Although higher base oil prices and freight costs have a big thumbprint on the third round of finished lubricant prices in 2017, increases in the cost of packaging materials, including steel, resin and paperboard, were also seen this year. As an example, Greif, a global leader in industrial packaging products and services, announced an increase on the price of steel drums of 5%, effective March 2017. Greif attributed the increase to escalating raw material and other input costs. Although not specific to Greif, some blenders say that where they used to pay $23 to 25 for a 55-gallon drum in 2016, they are now looking at prices closer to $30 a drum.

The price of corrugated boxes also increased significantly in 2017. There are a myriad of reasons for the increase including, an explosion at an International Paper factory at the beginning of the year that reduced US paper production by 5%. In addition, increased demand for boxes to fulfill e-commerce transactions, increases in export demand, higher freight costs, investment to meet regulatory requirements, and increases in labor and energy also has an effect. One of the more recent increases underscoring the higher price of packaging came when Georgia-Pacific reportedly announced in September a $50 a ton price increase on linerboard and a $60 a ton increase on corrugated to take effect on October 10, 2017

Although the price of resin used to manufacture plastic bottles is slowly returning to normalcy, production and supply line interruptions cause by Hurricane Harvey took its toll on resin prices. Polyethylene producers pushed through two rounds of price increases from August to October. When taken together, these increases totaled close to $0.10 a pound.

Adding to the higher cost of drums, pails, quart bottles, cartons and other packaging materials, blenders and distributors are also seeing the cost to procure these materials increase circling back to the higher freight prices.

So for those asking why we are seeing a third round of lubricant price increases in 2017, the answer is complex and goes well beyond increases in the price of base oil. It includes the higher cost of additives, transportation, packaging, labor, and others. These cost increases are real, and producers and distributors typically pass them on, and maybe a little more to improve their margins, by increasing the price of their finished lubricant if they want to stay in business and remain healthy.

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