Impact of COVID-19 on the Lubricants Industry

Tom Weyenberg and Matt Rudd

January 28, 2021
09:30am CST (Beijing)
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Safety Moment | Slips and Falls in Icy Conditions
• Common injuries from falling on ice
– Muscle sprain and ligament strains
– Fractures and broken bones
– Back injury and pain
– Concussions and other head injuries
• How to prevent slips and falls on ice
– Wear proper footwear
– Take short steps
– Sprinkle deicer or sand on icy patches
– Carry a mobile phone with you
– Don’t rush, take your time and be aware
of changes in your surroundings

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About our Speakers
Tom Weyenberg
Director, Insights Engine, The Lubrizol Corporation
Tom’s career at Lubrizol has spanned 35 years in a variety of commercial roles in the
fuel and lubricant additives business.

Matt Rudd
Director, Consumer & Market Insights, The Lubrizol Corporation
Matt has 25 years of global experience in both B2C and B2B Sales, and brand and
marketing management covering both fast-moving consumer goods and lubricants.

5 © The Lubrizol Corporation

 Impact of COVID-19 on
the Lubricant Industry

Tom Weyenberg and Matt Rudd

January 28, 2021

© The Lubrizol Corporation

Economic Recovery is Linked to Vaccination
• Surging infection rates
COVID-19 Cases
• COVID fatigue
• New strains
• The vaccine rollout is the
bridge between virus
containment and recovery

Vaccines will unlock economic activity, demand and employment.

7 © The Lubrizol Corporation

Source: World Health Organization
Every Region Will Rebound in 2021
Growth y/y hides lingering weakness in many regions, particularly in countries that see
sustained wage and employment weakness going forward

Real GDP growth in 2021, % y/y

6.6
4.7 4.2 4.7 4.3
3.4 3.2 3.3 3.8
2.3 2.3
1.3
0.4 0.4

-2.3
-4.1 -4.2 -4.9
-5.8
-7.6 -7.6
Asia Pacific Central & Sub-Saharan North America Middle East & Western Europe Latin America
Eastern Europe Africa North Africa

2019 2020 2021

8 © The Lubrizol Corporation

Source: FrontierView, Nov. 2020
Economic Outlook: Time to Recovery
For most countries, it will take two years to return to pre-COVID-19 levels of aggregate demand
Year the country is forecast to return to 2019 levels of real GDP
2020 2021 2022 2023 2024+
• China • Indonesia • Angola • Brazil • Algeria
• Egypt • Kazakhstan • Bangladesh • Chile • Argentina
• Kenya • Malaysia • Colombia • Germany • Ecuador
• Senegal • South Korea • Czech Republic • Japan • France
• Vietnam • Hungary • Peru • Greece
• India • Canada • Italy
• Nigeria • Mexico
• Romania • South Africa
• Russia • Spain
• Saudi Arabia • United Kingdom
• Slovakia
• Thailand
• Turkey
• UAE
• Ukraine
• United States

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Source: FrontierView, Nov. 2020
 Recovery Shape: Swoosh and K
The swoosh-shaped recovery
Illustrative real GDP index Internet retail Tech
Tech hardware workers

K
4Q 2019 = 100 Software

Overall Demand

Airlines Service
4Q- 1Q- 2Q- 3Q- 4Q- 1Q- 2Q- 3Q- 4Q- Hotels workers
2019 2020 2020 2020 2020 2021 2021 2021 2021
Restaurants

Winners and losers emerging in some consumer groups and industries

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 Temporary vs. Structural Change
Structural decline
• Business travel
• Some conferencing
activity & services
• Physical goods retail
(non-food)
• Non-electric autos in
developed markets
• Capital goods for O&G
exploration
11 © The Lubrizol Corporation
COVID-related decline Neutral COVID-related increase Structural increase
• Non-COVID related • Construction (non- • COVID-related • IT & communications,
healthcare products, commercial) healthcare products & 5G
elective procedures • Luxury goods PPE • E-commerce logistics,
• Commercial real estate • Agriculture • Sanitary and cleaning infrastructure &
& related construction • Financial services products services
& services products • Food & staples • Home working • Electric vehicles &
• Premium products & electronics, home related infrastructure
esp. services entertainment • Goods & services
• Holiday tourism products supporting
• Personal travel • Consumer durables (ex. sustainability
• Textiles house & kitchen (packaging, energy
• Extractives/mining appliances, furniture) efficiency, sustainable
• Machinery & farming, etc.)
equipment • Automation services &
• Aerospace products, including
factory automation
 Demand Drivers
Passenger Vehicle Miles Traveled
• Successful transition to remote work for
many businesses
• Expect some remote work to continue long-
term
• Hybrid office / work from home / 5-2 to 3-2-2
• Impact?
– US commuting is 25% of miles traveled1
– If 20% of employees work from home three
days per week, overall miles traveled drops
by 3%
12 © The Lubrizol Corporation
“More than 20 percent of the workforce
could work remotely three to five days a
week as effectively as they could if working
from an office. If remote work took hold at
that level, that would mean three to four
times as many people working from home
than before the pandemic and would have a
profound impact on urban economies,
transportation, and consumer spending,
among other things.”
McKinsey Global Institute
Nov. 2020 study across nine
countries
1 Source: U.S DOT: NHTS 2017
 Demand Drivers
Electrification Light Vehicle Production Forecast
120
• ICE & ICE:Stop/Start production will
never recover to pre-COVID levels 100

• Mild hybrids surge 80

• EV outlook is strong 60

Millions
– Recovery support in China, Europe and 40
U.S. emphasize green transportation
20
– Increased model availability, choice
– Large regional differences 0

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032
• 79% of 2032 production expected to ICE ICE: Stop/Start Hybrid-Mild Hybrid-Full
contain an internal combustion engine Plug-In Hybrid Electric Fuel Cell

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Source: IHS Markit AutoInsight Powertrain Forecast Updated January 2021
 Pent-Up Demand: A New Roaring 20’s?
• Consumers who have the means to consume have
been restricted

• As vaccine rollout becomes widespread, demand for

travel, restaurants and entertainment will surge,
fueling a service sector recovery

• Prepare for “road trip” vehicle servicing

The UCLA Anderson School of Management forecasts that the ’20s will indeed be roaring
once people are vaccinated and the country opens up fully. UCLA economists believe that
people will want to make up for lost time by spending money they saved during the
pandemic—akin to what many Americans did following the 1918 flu pandemic.
- Wall Street Journal, Jan 12, 2021

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 Near-Term Lubricant Demand
2020 Regional Demand
Global Lubricant Demand
45,000 China
40,545 40,253 -11%
40,000
37,801 Recovery to
35,230 2019 levels
35,000 Indonesia
-13.1% -13.5
kilotonnes

30,000

25,000 Germany
-25.4
20,000

15,000 USA
-13.7
10,000
2019 2020 2021 2024
Brazil
-15.2

15 © The Lubrizol Corporation

Source: Kline & Co, COVID Report 2020
 Near-Term Lubricant Demand
• Passenger Vehicle Lubricant Demand Outlook
Lubricants (PVL) 120%
hardest hit in 2020;

Percent of 2019 Demand

100%
mixed outlook for
2024 80%

60%
• Commercial Vehicle
40%
Lubricants (CVL)
most resilient in 2020; 20%
growth to 2024 0%
China Indonesia Germany USA Brazil

• Industrial lubricants 2020 PVL 2020 CVL 2020 IND 2024 PVL 2024 CVL 2024 IND

(IND) growth to 2024

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Source: Kline & Co, COVID Report 2020
 Some Themes from our Last Webinar
• In tough economic times, consumer brands at the top and the bottom
of the category perform the best

• Personal safety / hygiene is a purchase factor that is here to stay

• The Commercial On-Road market looked poised to recover first

• Industrial growth will be fragmented and highly dependent on sector

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 USA Retail: Tough Times for Middle of the Market
Percentage Change in Sales Volume vs 2019
15.0% 11.7%
10.6%
10.0% 5.9%
5.0%
0.0%
-0.8%
-5.0% -2.4% -2.3%
-4.3% -2.9%-1.9%
-10.0% -5.8% -7.2% -8.2%
-15.0% -11.2%
-20.0%
-18.5%
-19.7%
-25.0%
-30.0% -25.6%
TOTAL PCMO Top 4 Brands All Other Brands Private Label
1Q2020 2Q2020 3Q2020 4Q2020

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Source: The NPD Group Retail Tracking Service
 China Retail: Top Brands Underperformed
Percentage Change in Sales Volume vs 2019
10% 8%
6%

0%
-1%
-4%
-10%
-10%
-13% -14%
-20% -18%
-21%
-30%

-40%

-44% -45% -44%

-50%
TOTAL PCMO Top4 Brands All Other Brands
1Q2020 2Q2020 3Q2020 4Q2020
• Data based on Lubrizol commission retail audit across 30 cities in China
19 © The Lubrizol Corporation
• Remark: 2020Dec data is not available, Q4 based on Oct & Nov
 Personal Safety & Hygiene

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Source: USA Consumers responding to concepts around surface hygiene. Lubrizol Custom Research
 On-Road Freight Recovery is Uneven
• US indices (e.g. Cass Freight) showed sharp rebound in
2H. Driver shortages a key challenge.

• China road freight contracted 0.3%, impacted by COVID

1H and export slowdown in 2H

• India market sluggish, driven by reduced factory outputs.

Vehicle costs depressing sales of Bharat Stage VI trucks.

• European road freight down 6.8%, due to lockdowns,

factory closures and the second COVID-19 wave
Sources: JOC.com, PRC Ministry of Transport,
21 © The Lubrizol Corporation Transport Intelligence, Economic Times. Lubrizol
proprietary research
 Headline Industrial Growth Has Returned...
Manufacturing Purchasing Managers Index
65

60

55 **
50

45

40

35
*
30
USA China Euro Zone
April May June July August September October November December
* Lowest since current methodology adopted in 1997
* Highest since May 2018

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Source: IHS Markit USA & Eurozone, Caixin China
 … but Depends on the Sector

• Agriculture & Food Production

• Electricity Generation
• Housing and Commercial Building Construction
• Select Mining Production (Copper, Rare Earth, Gold)

• Aerospace
• Auto Manufacturing
• Oil & Gas Exploration & Extraction
• Marine
23 © The Lubrizol Corporation
Source: Kline, AGMA, NFPA, Lubrizol Analysis
 Era of Category Value over Volume
• Accelerating the Move Towards
– Greater efficiency
– Extended performance MOVE
– Cleaner / better / robust CLEANER
– Higher value

• Product Portfolio Mixes Becoming CREATE

SMARTER
– More synthetic
– Lower viscosity
– Increased, robust additive protection
LIVE
BETTER
24 © The Lubrizol Corporation
 In Conclusion
• There is light at the end of the tunnel, but the nearness and intensity of
the light differs
– Economic outlook varies by country
– K-shaped impacts: good news and bad news
– Resilient recovery vs. structural change

• Category Value is now paramount

– Low to no growth in many markets with PVL especially challenged
– Higher performing lubricants that speak to the benefits of technology
– Hygiene and safety are here to stay
– Positively impact industry & lives
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 Q&A

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 SPARES FROM HERE ONWARDS

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 Agenda (Tom’s working section)
• Perspective: the light at the end of the tunnel is a vaccine
• Ranked recovery: economic outlook varies by country
– Use partial heatmap
• K-shaped impacts: good news and bad news
– Vaccinations will release (some) pent-up demand
– Consumer indicators of pent up
• It’s not the same: resilient recovery vs structural change (FV slide 18)
– Historically resilient industry
– Accelerating electrification due to policy changes
– Accelerating efficiency
• Lubricant demand view
– Consumer / Commercial / Industrial
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– Adding demand to heatmap
 Perspective on Vaccines

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 Economic Outlook
• Country level view – mixed outcomes
• Chart actual GDP normalized over next 5 years

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 Economic Outlook – Time to Recovery
• Chart showing years 2020-2025
• Country flag in year country recovers to 2019 level

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 A K-shaped Recovery
• Consumers: rich vs poor
• Industries: surged vs deep drop
• Countries: resilient vs challenges

• Implication is that the recovery will be a mixture of results

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 Pent-Up demand: the Roaring 20’s Hypothesis

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 Industry impact
• FV vertical bar chart by industry 2020 results

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 Temporary vs Structural Change

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 Electrification Outlook

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 Accelerating the move toward Efficiency
• Transportation / Industrial / Commercial

• Message on value vs volume:

– More efficient
– Longer drain
– Cleaner / better / robust Chart showing
– Higher value
vehicle lifetime
lubricant value vs
• Which will look like:
volume
– Synthetic
– Lower viscosity
– Robust additive protection

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 Lubricant Demand Outlook
• IHS and Kline

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 Near Term Outlook
• Lubrizol Heatmap

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 Matt’s Section

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