It’s a universally accepted truth that nobody likes or wants an increase in price, and pricing is a sensitive topic for us at SCL. We understand what a lubricant price increase can mean for our customer’s bottom line and as a logistic and solutions provider we do our best to develop cost saving strategies that will allow your business to weather these elevated expenses. To help take the sting out of having to absorb a lubricant price increase for certain products, we wanted to explain what’s behind these unwanted additional costs. The best way to understand fluctuations in pricing is to take an overarching, holistic view – looking at market changes from the perspective of what factors are associated with the price of a barrel of oil.
A lubricant price increase is directly tied to the economy as a whole and can be influenced by many external factors. 90% of the price increases we see originate on Wall Street and are driven by the fluctuating cost of raw materials. The cost of these raw materials can be impacted by such things as a glut of supply, a hike in demand, the impact of global natural disasters such as hurricanes or earthquakes that may influence production or shipping and political unrest in other countries such as protests, strikes, embargoes or even war. Only 12-13% of our base oils come from other countries like Saudi Arabia, but even with that marginal percentage we are significantly impacted by fluctuations in their production levels and economic climate.
Everything is Connected with a Lubricant Price Increase
Based on the cost of these raw materials in the form of crude, base oils, additives and even packaging materials, oil manufacturers set the pricing for all lubricant distributors like SCL. In the global marketplace, a rise in price for them is a rise in price for us, and unfortunately, those price increases are then passed along the chain to the domestic users of a product – you – our customers. Each year we receive notifications from our manufacturing partners – Shell, ExxonMobile, Phillips66, Chevron, etc that a price increase is pending.
This year we were alerted by all manufacturers that by March 6th, 2017 we would see an approximate lubricant price increase of 5% on branded and unbranded finished lubricants and greases. Pricing is evaluated on a product by product basis and is driven by increases in raw materials costs that has traveled up the line to impact the cost of product manufacturing. Since it all begins with the cost of a raw material, every segment of the life cycle of a product is impacted – exploration, extraction, refining and processing, packaging and perhaps most impactful, the cost of transportation thru increased fuel prices.
Advance Notice from Manufacturers
With an advance notice from our manufacturers we are able to communicate these price increases to our customers as quickly and transparently as possible in an effort to develop cost savings strategies that will help to manage elevated costs. As a means of satisfying all customers needs with a fair fulfilment process, manufacturers generally cap distributors and marketers at 110% of their monthly base volume from the previous year, asking that they keep orders consistent with the historical needs of their customers rather than exceeding supply by trying to overstock products at a lower price rate.
The Economic Pie
A barrel of oil is like a pie, with each slice going toward the production of a different petroleum-based product such as gasoline, diesel, jet fuel, liquefied petroleum gases (LPG), coke, kerosene, various distillates and finished lubricant products such as greases. External forces are constantly impacting the price of that barrel of oil and are subsequently affecting each slice of the pie. In general, there are 42 gallons of oil in a barrel of crude and out of those 42 gallons, only ½ of a gallon is used toward finished lubricants – what we sell at SCL.
The ½ gallon of crude that becomes our finished product line is one of the smallest slices of pie, and it’s price is impacted along with all of the other components. According to Dan Dziwanowski, SCL Sales Consultant, “The price increase could actually be a lot higher if you consider fluctuations in the cost of gasoline. A rise in the cost of fuel is huge since 90% of all US products are delivered via truck. That increase alone kicks off a chain reaction that ultimately affects finished lubricants, although usually 3-4 weeks behind fuel, which tends to fluctuate daily.”
Cost Saving Solutions
Prices are going to continue to go up, or at the very least they’re going to continue to fluctuate, so regardless of how we word it, it’s sort of like putting lipstick on a pig. Within the parameters of an inevitable price increase, however, we’ve developed various cost savings strategies that can help take the sting out of paying more for certain products. For example, we try to work within the manufacturer’s 110% cap to order as much product as possible at the lower rate before prices increase.
Another solution is to perform an audit of your inventory to calculate how much of a certain product you’re currently using and what alternatives might be available to save you 1-2% on fuel economy. By running a lower viscosity or synthetic grade oil you decrease wear and help your engines run smoother and longer. SCL can also absorb some of the increased costs if customers are willing and able to purchase in higher quantities and volumes. Higher volume = lower pricing for large fleets such as towing or trucking lines. Inventory consolidation is another option and can help free up your cash flow and warehouse space.
In a wide range of industrial sectors, if there’s metal touching metal, we’re involved. At SCL, we’re here to protect and optimize the machines that keep our country moving and we pride ourselves on providing superior logistics and solutions, extensive product and industry knowledge and total performance satisfaction for our customers. With the inevitability of price increases for certain products based on fluctuations in the cost of raw materials, we strive to remain fully transparent when it comes to such significant changes and are here to assist your business in finding creative cost savings solutions that will make such price increases less painful. Contact an SCL consultant today for more information.