Warren Buffett’s Analysis on the Additives Industry

The first time I came across Ruifeng New Materials (SZ300910) was during the U.S.-China trade war. While everything else was falling, it was one of the few stocks that rose. Its chart looked beautiful. I began looking into the story behind it and came across the logic of domestic substitution in the lubricant additives industry. But the price had run up too far, so I didn’t enter. Recently, I spent more time digging into it. Here's my conclusion:

Industry & Business Model

Lubricant additives aren’t sold directly to consumers—they’re critical raw materials in lubricant production. It’s a great industry. Buffett invested in it, and it’s relatively insulated from crude oil price fluctuations. When oil prices fall, their margins tend to improve in the short term, because raw material costs drop faster than end prices adjust.

The downstream use cases are broad—transportation, machinery, heavy industry. Additives are consumables and thus a necessity. Globally, the “big four” additive producers dominate 85% of the market. Ruifeng supplies them, and its own margins are strong: ~30% gross margin and 20% net margin. It’s a high-ROE business model.

Barriers to entry are high. API certification alone takes two years. Deep partnerships are required with lubricant brands like PetroChina and ExxonMobil to get into the supply chain. This is a capex- and technology-intensive chemical business, where customers care more about quality than price—because if the additive fails, it could destroy an entire machine.

Domestic Substitution + Export Growth

The story now is both domestic substitution and global expansion. About 70% of revenue comes from exports. The global supply chain is tilting toward China. Imported additives are subject to tariffs over 30%, which is accelerating import substitution.

Ruifeng is also upgrading its product line, transitioning from single-agent to compound additives. This reminds me of companies like Neway Valve (SH603699)—small, specialized giants with dominant positions in niche markets, representing the rise of “Advanced Manufacturing in China.”

Both firms have only recently entered global supply chains. One key catalyst was the pandemic, which triggered global realignment. In 2022, Ruifeng captured a huge chunk of the Russian market due to Western sanctions. My view is: once you enter the supply chain, your market share tends to grow over time. All you need is an opportunity to prove yourself.

The company’s market cap is just over ¥10 billion. PetroChina is a shareholder, and I’ve seen some major public funds like Gao Yi Capital in the mix. With 550,000 tons of capacity gradually coming online, growth of 20%+ per year looks achievable. The valuation isn’t expensive at ~20× PE. I’ll consider buying if I get a good entry.

Buffett’s Take on the Industry

1. Buffett’s Overall View on Lubrizol

"Lubrizol is exactly the sort of company with which we love to partner—the global leader in several market applications run by a talented CEO."
— Warren Buffett, March 2011, Berkshire Hathaway press release

Buffett loves companies where the product is a small cost component but mission-critical. Customers won’t switch unless something goes terribly wrong. That inertia is what underpins the Big Four’s dominance. However, COVID and geopolitics cracked this structure—giving companies like Ruifeng a rare opportunity to break in.

Ruifeng’s management deserves credit. Every time there’s a window of opportunity, they’ve seized it quickly and scaled aggressively. In a few years, they’ve become a leading additive producer in China. In investing, we value management’s track record—this one looks solid.

2. China Market Outlook

China is the world’s second-largest lubricant consumer after the U.S., at ~1.1 million tons (global market: 5.5 million tons, so 20%+ share). We used to depend heavily on imports. But with domestic breakthroughs, we’ve become a net exporter. There’s still a large substitution gap.

The trade war has accelerated this process. Foreign additive makers are losing share in China. Downstream producers now actively seek domestic suppliers to reduce geopolitical risk. Ruifeng, being the largest local additive maker and a supplier to PetroChina, is well-positioned to benefit.

3. Quoting a Fellow Investor (Brillian) on the Substitution Trend:

Since the pandemic, ocean freight prices surged and ports were congested. The Big Four prioritized large global clients, meaning Chinese mid-sized private companies couldn’t get supply. This forced them to turn to domestic producers.
Domestic additive companies have improved massively. In both single-agent and compound additives, performance is now close to the Big Four, but prices are 30% cheaper. Even if the Big Four resume normal supply, clients won’t return—their cost base has already been permanently lowered. The Big Four likely lost these customers forever.
For PetroChina and Sinopec, decoupling from the Big Four is about supply chain security. Lubricants might seem niche, but without them, machines stop working—geopolitical disruptions revealed this bottleneck. So substitution is accelerating.

Multinationals face two choices:
Abandon low-end products;
Let Chinese additive suppliers into their systems.
I believe the latter is inevitable if they want to stay in China. There’s a ¥10 billion+ substitution opportunity in the domestic market alone.

4. Export Capabilities

Ruifeng’s exports exceed 70% of total sales. They’ve secured API certification and are certified to supply ExxonMobil’s industrial compound additives. So their story isn’t just about domestic substitution—they’re going global. They offer better margins and less competition, using cost advantages and strong product quality to win new orders.

2022 saw an export boom from the Russia market, but now Ruifeng is diversifying export destinations.

5. Downstream Use Cases & Market Segmentation

Additives aren’t just for autos. The Big Four dominate the consumer lubricant (ToC) market with strong branding and in-house additive production—hard to break into. But the industrial (ToB) side—such as marine lubricants, gear oils—is far more cost-sensitive and easier to disrupt.

Ruifeng is gaining share here. Compound additives’ domestic market share is expected to reach 25% by 2025. As R&D spending rises, I believe Ruifeng can penetrate more verticals and achieve premiumization.

6. Buffett’s Comments on Industry Economics

“Lubrizol is the kind of company we like: essential products, strong global position, steady earnings, long-term visibility.”
— CNBC, March 2011

Buffett likes industries that are stable, non-disruptable, and relatively immune to macro swings—additives fit that mold.

7. Pricing Power

“Lubrizol has the ability to pass on raw material cost increases to customers. That’s the kind of pricing power we look for.”
— Buffett’s commentary

Raw material (mainly oil-refined derivatives) makes up ~90% of direct costs. When oil drops to ~$60/barrel, lubricant producers benefit since price passthrough lags. When costs rise, they can still pass it downstream over time due to strong market control.
Looking at base oil vs. lubricant retail price charts: even as oil dropped back to $60 from ~$100 in 2022, lubricant prices have remained elevated. That’s pricing power.

8. Global Competitor: NewMarket Corp (NEU)

Among the Big Four, two are oil majors (Exxon, Chevron), and Buffett owns Lubrizol. The only listed pure-play left is NewMarket (NEU). Its stock has been very strong, confirming that this is a solid industry. NEU is aiming for 10% annual returns, but growth has slowed.

I have reached out to NEU for comments on the competitive dynamics within China and abroad following the rise of Richful Lubricant Addictives, but they have not responded.

By comparison, Ruifeng is growing 2x faster, so it deserves a valuation premium.

9. Why Ruifeng Is More Efficient

I read NewMarket’s filings. Ruifeng compares favorably—even slightly better in some metrics.
Why?

Avoiding Low-Margin Segments:
The Big Four cover all segments, including commoditized ones with 10–15% margins, which drags down overall profitability.
Cost Efficiency & Integration:
Ruifeng benefits from China’s downstream petrochemical networks. Its feedstocks (e.g., phenols, alkylbenzene sulfonates) are cheaper and more stable.
Lower labor and tax costs in China also help. Their integration strategy is working well.

10. Valuation & Outlook

Oil prices are currently near 2019 levels. Ruifeng’s margin still has room to improve. A spike in oil prices would hurt short term, but the impact is limited and can be passed through eventually.

The stock did pull back recently after news about the U.S.-China trade deal, but the long-term trend remains intact: accelerating substitution and export growth. Capacity is sufficient, and production is mostly made-to-order.

Valuation: At 18–20× PE, I think the stock is attractive for long-term holding.

However, there is a potential risk that the company might be added to the U.S. sanctions list due to its business dealings with Russia. Nonetheless, I believe this possibility is low. Firstly, this is a niche sector that hasn't attracted much public attention, unlike industries such as semiconductors, 5G, or drones. Secondly, within the industry, the company maintains good relationships, and its partners are profiting from the collaboration and thus are unlikely to disrupt the harmony by reporting it. Therefore, the likelihood of being reported is relatively low.