Crucial EU decision on base oils tariff suspension hangs over US Group II imports

Author: Vicky Ellis

2019/06/12

LONDON (ICIS)--EU countries are debating whether to continue to allow the import of Group II base oils without a 3.7% tariff and the consequences of this decision could be sizeable on both sides of the Atlantic, although they are not likely to hit until 2020.

\EU tariffsImports of Group II base oils into Europe, for example from the US - which is a major exporter - currently qualify for a suspension of the 3.7% duty.

The EU’s Economic Tariff Question Committee is understood to be discussing whether to remove certain Group II products from the current tariff suspension, introduce a quota or leave the current suspension in place.

Any outcome is expected to take effect in 2020.

European additive and blender businesses have questions to ask about the availability of Group II base oils - including approved Group II base oils - if the tariff duty suspension is scrapped, and whether they will have to pay more for approved imported material as a result.

The argument in favour of ditching the tariff waiver hinges on the point that a new Dutch refinery - with a nameplate capacity of 1m tonnes a year (but pegged at a lower output by some industry estimates) - plus other smaller volumes from European producers, could cater to most of Europe’s demand.

However, the other side of the argument suggests that this will not be enough for Europe's Group II demand, and that removing the waiver could create a less competitive environment.

GROUP II CONSUMPTION UNDER SPOTLIGHT
At the root of the matter is a dispute over the amount of Europe’s Group II consumption, how much it will grow over the next few years and whether this means Europe will need to import or not.

Asked whether Europe needs more than what ExxonMobil can provide, industry players are divided.

“Group II will be needed for sure more than [ExxonMobil] can produce, the question is when. Not this year and not next year,” said one European distributor.

“Although local production may fulfil the current technical demand, however there is still a significant interest for [Group] II importers to bring the volumes into Europe mainly from US,” said a consumer, who pointed out that the consolidation of Group I and replacing Group III by Group II+ “may also play an important role”.

There are also those who question the absolute necessity for Group II. One source with experience of blending said:

“I don't think that necessarily the market needs Group II to replace completely Group I. Technically there is no need... I don't believe there’s any OEM that describes any of these base oil groups. It's a choice.”

Whatever the decision regarding the tariff waiver, it could impact both sides of the Atlantic and beyond.

David Wright, Director General of the UK Lubricants Association (UKLA) said that the UKLA welcomes ExxonMobil’s investment in Rotterdam to build domestic Group II capacity within the EU, but added that estimates indicate that there will continue to be a significant shortfall in supply versus domestic demand in Europe.

This means that a prolonged suspension of duty on Group II base oils coming into Europe will be necessary, Wright said.

“This will ensure domestic blenders have a choice of supply within a free and open market that encourages competition between suppliers in the interests of the end user and independents working in the sector which account for around 40% of the finished lubricant market,” he added.

ICIS analytics estimates indicate that Europe will still be a net importer of Group II, despite the new plant and existing capacity.

“It is likely that some of the ExxonMobil product will be exported as it is one of the three global hubs for ExxonMobil Group II, along with Baytown and Singapore, and would be competitive to growing African and Middle Eastern markets,” Michael Connolly, senior consultant, Global Refining Team at ICIS said.

Site Current capacity (Kbbl/day) Current capacity (KMTA) S/U year
ROTTERDAM 20 1000 2019
BAYTOWN 18 910 2000
JURONG 37 1850 1997
JURONG 20 1000 2023

Source : ICIS Supply and Demand Database

Even if domestic Group II production in Europe could cover demand forecasts, any tariff could mean that players wanting to use their own base oils imported from outside of the EU may be impacted.

WHAT IS A DUTY SUSPENSION?
The Commission website states that: “The EU’s temporary duty suspensions and tariff quotas regime allows the duty free importation into the EU of raw materials, components and semi-finished products which cannot be supplied (or supplied in sufficient quantities) from EU or Turkish manufacturers and are used in a process to make another product.

“Suspensions allow unlimited quantities to be imported into the EU whereas quotas allow limited quantities to be imported. This regime cannot be used simply to import for resale.

“Once granted, a suspension or quota can be used by any business in the EU - it is not specific to the company which applied. If your product is covered by an existing suspension or quota, you do not need to make a new request."

Additional reporting by Michael Connolly and Sarah Trinder

Picture source: Shutterstock