Summary
Lubrizol and Newmarket both recently announced drastically improved sequential profit margins in a difficult general business environment. The doubling in run rate operating margins in 2009 suggests a structural change in the supplier customer price negotiation process. What happened in the lubricant additives business could also happen in other specialty chemical areas. The key requirement is that suppliers mange their product profile to help improve their customers profitability.
Analysis
Superior suppliers of speciality chemicals should have an important role in helping their customers improve profitability. Doing downstream market research and delivering new products which allow their customers to differentiate consumer products, lead to happy customers and ultimately to happy suppliers.
The lubricant additive companies have discovered that helping their customers make more money through differentiated, longer lasting and higher priced finished lubricants significantly reduces price pressure on their own products. Additive margins have grown in spite of the broad economic trends. While capacity and cost control are important, helping your customers make more money is perhaps even more important. Lubricant margins are at historic highs as lube prices have continued to rise in spite of declining crude values. The oil companies are delivering enhanced oil life which consumers are willing to pay for. The additive companies have played a crucial role in this upgrade and are participating in the margin improvement.
The key lesson for other speciality suppliers is to have a downstream focus which helps your customer identify new opportunities based on your products. Doing retail market research may be a stretch for a non consumer company but it sometimes leads to useful new products and higher profits.
