A conversation on Gauging the Future…
As we launch into our business plans for 2016, how can we best communicate the value of the lubricants business to our Board members, the financial community, and the rest of the energy industry? If we follow the pace of volume growth as a commodity refiner or chemicals producer would tend to measure, the outlook does not generate shouts of joy. In the past 15 years we have only registered a total growth of 4% as gains in Asia Pacific have been offset by declines in Europe and parts of the Americas, as well as the impact of two global economic recessions. Going forward our models signal an annual average growth of about 2% over the next decade… let’s call it flat.
Following the money trail… The picture is quite different. During this same period, the collective value in margin terms as generated by the fully integrated business has grown 2.5 times to a total $65 billion in Gross Margin. The largest group of beneficiaries has been the branded marketers who have managed to generate 43% or $28 billion of the GM pool by offsetting volume declines in home-based and mature markets with earnings growth. This includes Multinational oil, National oil, and Independent marketers.
Trade participants in the retail Do-It-Yourself and strength in Do-It-For-Me channels such as OEM dealership workshops, independent workshops, and quick lubes have also been riding the upward trajectory of value.
The financial magic… It comes from three big sources. By far the largest source has been the discipline learned by marketers to maintain product margins as base oil prices escalated from about $300 per ton in 2000 to a peak of about $1,000
per ton in 2011, and then capturing the margin tailwinds as base oil declined thereafter. Managing competitive pricing in a highly volatile base oil cost environment has generated leading profits. Another important source is the up-trading of product portfolios to higher margin branded synthetics and premium products. And lastly, as volume growth has shifted regionally, marketers have had to persistently re-align their business footprint of supply chain, route-to- market, and investments in marketing and technology to keep operating costs in-check. The expanding use of digital marketing and social media is also contributing to lower costs.
Overall progress is reflected in key financial indicators such as the advancement of industry average Return-on-Capital Employed (ROCE), reflecting improved capital efficiency, and the weighted average gross margin for all global marketers that increased from about 30 cents per litre in 2000, to almost 80 cents per litre today. Not all competitors have benefited equally, and even the market leaders are continuously making adjustments to extract value.
Jagger Advisory’s financial models project that over the next 5 years marketers will add another $7.6 billion to their
22
growth
LUBE MAGAZINE NO.131 FEBRUARY 2016
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65