Low crude oil prices, decreased demand from industrial burners and growth in rerefining capacity have been the three major contributors to the rerefining industrys trend away from pay-for-oil toward charge-to-collect, Vertex Energy CEO Ben Cowart told attendees of the ICIS Pan American Base Oils and Lubricants Conference on Dec. 4 in Jersey City, N.J.
Rerefiners are one of three major markets for the 1.3 billion gallons of used motor oil generated in the U.S. each year, Cowart reported, along with industrial burners and export blenders. The burner fuel markets, which make up half of the used oil market today, are contracting rather quickly, he said, as many large burners have switched to cheaper natural gas. The export market is also shrinking. Combined with rapid growth in rerefining capacity between 2010 and 2014 – from 323 million gallons then to 435 million now – rerefiners are feeling the pressure.
Courtesy of Vertex Energy
Vertex Energy’s rerefinery in Columbus, Ohio.
Its been a very challenging period with low oil prices and the oversupply in base oil, said Cowart. We believe the [used oil] market could eventually get to an oversupply situation, much like the base oil market today. He continued, Our industry will not survive with these base oil prices, along with the continued discounts on our rerefined product. We understand that were a captive producer and that we have little leverage today over who were selling our product to in an oversupplied market. So that means we have to go even harder to the generator to manage our spread.
Houston, Texas-based Vertex began charging its generators 10 cents per gallon for collection in December 2014. Previously, it had paid about $1/gal. Fellow rerefiner Safety-Kleen began charging for collection nine months later, and on Dec. 22 announced an increase of $80 per stop.
We believe the industry will move to a charge-for-oil scenario across the board if oil prices prevail at these levels, Cowart asserted in New Jersey. The question is: What is the pain that companies will go through in making the transition?
As regulations around disposal and consumption of used motor oil become more stringent, collection volumes are rising. While Vertex initially saw a drop of about 12 percent in collection volume in January 2015, volumes quickly picked up again in February, and Cowart said collections this summer were up 50 percent over January 2014. The company posted revenues of $188.5 million in 2015.
In addition to charging for pickup, Cowart highlighted vertical integration, exporting and improving quality as potential responses to the U.S. oversupply of virgin base oil. Many rerefiners now have the capacity to make their own finished lubricants. Declining U.S. base oil prices and environmental regulations abroad have increased export demands. Further, he explained, rerefined base oil is now on par with or better than virgin API Group II stock, and can lower blending costs for customers because it requires less Group III corrector.
To overcome pricing volatility, Cowart stressed the importance of flexibility to produce either base oil or vacuum gas oil, based on market conditions. A new market is opening up for rerefined VGO in the marine industry because of Vessel General Permit requirements for low-sulfur fuel. These requirements apply within a 200 nautical mile radius of the U.S. and European coast lines.
A lot of smaller companies may not survive, Cowart predicted, and the rerefining market will likely see a fair amount of consolidation along with new innovations. I believe the industry is heading in the right direction, he mused. Weve still got a lot of work to do; were not there yet. I believe at the end of this year we should see things stabilize.