Favorable Trends Should Drive Additive Margins for Lubrizol and Newmarket to Higher Levels

Implications: 1Q and 2Q margins for additive companies including Lubrizol, Newmarket and Innospec were strong. Significant changes in industry behavior and technology are combining to position these businesses for even higher future earning power.

Analysis: Due to a concentrated customer base, commodity like large volume products and historic market share growth seeking behavior, lubricant and fuel additive margins have historically lagged other specialty chemical companies in spite of the sophistication of their products.

Higher future margins are more likely because of the following shifts in industry dynamics:

1) The past 10 years were a period of basestock quality improvement, the next 10 will be years of change in additive performance

2) Growth of the DIFM oil change volumes and the weakening of oil company branding power

3) Higher performance oil, segmentation of the additive market and an increasing role for the equipment manufacturers in defining and marketing oil

4) Growth of diesel fuels in North America, which will require more higher margin additives than gasoline.

5) Migration to a higher service content marketing model with concomitant higher margins.

I believe the outlook for sustaining and improving current margins is favorable.