OUTLOOK '14: Europe, Russia base oil producers face testing year

03 January 2014 13:00 Source:ICIS News

By Ross Yeo

LONDON (ICIS)--European Group I base oil producers are set to face a challenge in 2014 from an influx of US-produced Group II material.

All eyes in the market are on the progress of US-based Chevron’s new 25,000 bbl/day Group II plant in Pascagoula, Mississippi, which is scheduled to begin commercial production by the end of the first quarter 2014, and will make the company the world’s largest Group II producer.

A significant proportion of the new plant’s output is set to flow into the European market, with Chevron building a new supply hub in Eastham, the UK, to complement its two existing European hubs in Antwerp, Belgium, and Hamburg, Germany.

Furthermore, the product is expected to be competitively priced relative to Group I material. Towards the end of 2013, Group II prices in Europe were only around $20-30/tonne higher than Group I prices. The influx of higher quality, similarly priced base oil is likely to put significant pressure on an already struggling market.

Both domestic European and export demand was underwhelming throughout 2013, and a recovery of the magnitude required to absorb the additional US material is unlikely.

Observers have noted seriously the possibility of refineries closing down in Europe in 2014 amid the hostile economic conditions.

A number in southern Europe reduced their operating rates during the second half of 2013 when faced with narrow production margins. Barring a significant decrease in feedstock prices, these margins appear unlikely to improve considerably in the near future.

“It will be interesting to see - will refineries close? If they make specialties they will be ok, but those that make only the basic base oils, they could be in trouble,” said a trader and distributor.

Other refineries that are also likely to come under pressure are those in Russia. One reason for this is the EU’s decision to reclassify Russia as no longer eligible for its Generalised Scheme of Preferences (GSP), which allows developing countries to pay lower duties on their exports to the EU.

The decision means that base oil imports from Russia will be subject to 3.7% duty from the beginning of 2014, up from 0% currently.

With the new US Group II material likely to push down European Group I prices, Russian Group I material, which is generally of lower quality and therefore lower price, will come under pressure also, squeezing the margins of Russian producers.

At the same time, large question marks remain over the future of Turkish demand, normally an important buyer of Russian material, because of new legislation due to come into effect in 2014.

Under the new legislation, base oil importers will need to apply to the EPDK (Republic of Turkey Energy Market Regulatory Authority) for base oil cargoes planned for the country.

Licences will be issued according to buyers’ finished-lubricant production capacity, and the amount of base oils they already hold in stock. Only lubricant producers will be able to apply for the licences, but base oil traders will be able to use them on behalf of the buyer.

During the second half of 2013, the effect of the upcoming legislation was to severely deplete Turkish demand for base oil imports, largely because of uncertainty surrounding the situation.

Whether or not demand recovers in 2014, and to what level, remains uncertain.

By Ross Yeo