OUTLOOK ’20: Europe base oils brace for myriad effects of IMO 2020, looming EU tariff

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Supply and demand are usually king for Europe’s base oils market.

When it comes to 2020, international regulations for shipping and European trade rules are big factors at play, which could insert themselves into the more typical push and pull of the supply-demand balance.

Players are steeling themselves for an uncertain year, be it the risk of rocky European economic performance or continued weak automotive demand (though forecasts are for a return to growth in 2020 for global automotive production), changes in refinery outputs or the impact of new global regulations and EU tariffs.

IMO LOW SULPHUR RULES INFILTRATE GROUP I
The major issue hanging over Group I in 2020 is the start of IMO 2020 rules governing low sulphur emissions for shipping from 1 January 2020.

Potential effects are numerous, including: access to feedstock vacuum gasoil (VGO); potential moves in price of that feedstock; the internal competition of the refinery; and changes in specifications in the downstream market for marine lubricants, which must alter to match the changing sulphur content of fuel oil.

What brings this even more sharply into focus is the wider dynamic in the base oils industry: doggedly low prices for Group I, especially lighter grades, are being prompted by an escalation in the shift towards Group II, III and poly alpha olefins (PAO) use for lubricants.

Margins remain pressured, with ongoing speculation about refineries cutting base oils output in favour of other products due to weak base oil values and comparatively high VGO prices. This may be compounded by preparation for IMO 2020 low sulphur fuel oil sales.

Speculation continues about the fortunes of Group I plants in Europe, and whether one could close after 2019’s relentless pressure on margins. Purchasing activity from a refiner in late 2019, some rather unusual buying for light grades for the export market, confused some in the market. There is speculation there may be shorter supply of lighter grades as refiners favour fuel oil oil ahead IMO.

The confusion underlines uncertainty about the impact of IM0 2020 rules, with talk of different approaches emerging from refiners’ sales strategies. Examples include – and this is not an exhaustive list – some reluctance to commit to contracts for the year due to uncertainty in the market, unless prices are fixed against VGO values, compared to a more aggressive attitude linked to protecting market share.

Concern about Turkey’s economy in 2020 is a factor watched by Black Sea market players. After 2019’s “tough” year, with an “all time low” for sales in Turkey cited by one trading firm, “most companies in the petchems sector are forecasting 2020 [to] be worse,” said the source.

While Europe’s demand eases, export demand should prop up the Group I market to some extent, with African markets in particular likely to be dominated by Group I for the foreseeable future as outlined by speakers including ExxonMobil at the ICIS African Base Oils & Lubricants conference in November 2019.
Source: ICIS by Samantha Wright https://www.icis.com/explore/resources/news/2020/01/09/10458169/outlook-20-europe-base-oils-brace-for-myriad-effects-of-imo-2020-looming-eu-tariff

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