Base oils 2013: Nigerian woes hit European exports

15 February 2013 09:50  [Source: ICB]

Last year was a challenging one for the European base oils export market, with many key export destinations showing lower demand. Among these were the three largest African markets - Nigeria, South Africa and Egypt - which, at various times and for various reasons, all imported less base oils than in previous years.

While much of this reduced demand for imports can be traced to economic factors - primarily the knock-on effects from the struggling eurozone - local factors were also in play. How these local factors evolve could have an effect on the European base oils market, in particular the Baltic Sea export market, which is again facing low demand.

Nigerian placards Rex Features

 Rex Features

Many Africans have more to worry about than getting their oil changed

Nigeria, the largest base oils importer in Africa, and therefore the market with probably the greatest influence on Europe, is estimated by traders to have shown 10-20% less demand than usual through 2012, with a number of reasons responsible. In January 2012, the Nigerian government announced plans to remove a fuel subsidy, which would more than double the price of gasoline at filling stations. The effect was twofold.

First, widespread strikes in protest against the plans brought the country to a near standstill. With both vehicle use and industry rates at minimum levels, demand for lubricants, and therefore base oils, plummeted.

Second, although the government compromised in the face of the strikes, removing only part of the subsidy, the gasoline price still increased significantly, eroding the spending power of an already poor population.

"If your disposable income goes down, oil changes are probably not your highest priority," says one European base oil trader with a specialist interest in Nigeria.

So even though the effects of the strikes have subsided, local demand for lubricants is probably still being undermined. Furthermore, the government is expected to follow through with its plan to fully remove the fuel subsidy, something which could cause a repeat of the 2012 scenario.

With the next presidential elections in 2015, sources have speculated that the move could be made well beforehand to dissipate the likelihood of negative opinion.

Another, potentially longer-lived, factor undermining Nigerian demand is terrorism and sectarian violence.

Sources say that whole businesses and traders have vacated affected areas, particularly in the north of the country that was traditionally responsible for large chunks of total Nigerian base oil demand.

A third unpredictable reason impacting ­Nigerian base oils demand in 2012 was a longer rainy season. This disruptive period, which in rural areas can render many roads inaccessible to regular vehicles, normally lasts from around July until September, but this year returned again in October for several weeks.

South Africa also suffered the effects of widespread strikes in the second half of the year, with the most intense action concentrated around October and November. One local trader estimates that base oils demand fell by 40-60% from previous months, while a blender says ­lubricant demand was down 50% year-on-year.

These decreases came when base oils demand had already slumped by as much as 20%, as a result of the struggling economy.

On the other hand, Egypt's decrease in base oil imports has been attributed to the restart in October of a 100,000 tonne/year brightstock plant that had been off line for two years, according to a local producer. However, it cannot be ignored that Egypt's economy is not in a healthy state, and this will have an impact on base oils consumption, if it has not already.

EFFECT ON EUROPE

While African demand for base oils is unlikely to be pivotal for European market health, it could nevertheless play a role. The area of most probable impact will be of Nigerian demand on the Baltic Sea market. With prices in the Baltic, and Europe, having fallen considerably throughout the fourth quarter of 2012, the Baltic market finds itself in a stalemate.

Producers are fed up with selling base oils at such low numbers, often at a loss, and, having reduced their plant rates, are now offering material at premiums to published prices.

  • Ross Yeo is an editor in the ICIS London office. He covers African base oil markets as well as gasoline, naphtha, crude oil and MTBE in Europe

By: Ross Yeo
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