Clean Harbors announced on Monday that its Safety-Kleen subsidiary and all of its waste oil collection businesses will raise prices related to collection of used engine and industrial oils, citing impacts from the IMO 2020 regulations went into full effect March 1.
Effective immediately, Safety-Kleen is increasing the cost of its charge-for-oil program across its used oil collection network, as well as increasing its service stop-fee for its stop-fee program. The stop-fee program is a fixed fee charged for visits to collect smaller amounts of used oil in lieu or in addition to its normal per-volume rate. The charge-for-oil increases will range up to 70 cents per gallon, the company said, depending on certain market factors and will apply to all gallons collected.
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These rate charges are the necessary result of two major external conditions affecting our business, Craig Linington, executive vice president of Safety-Kleen Oil, said in a news release. First, the new IMO 2020 regulation, which took full effect on March 1, requires more than 60,000 oceangoing vessels to transition from a 3.5 percent sulfur fuel oil to a 0.5 percent sulfur fuel oil. This regulation is severally limiting the outlets for used motor oil and waste fuels generated across North America and globally. The regulation is also materially depressing the value of many of our rerefined by products. Second, the coronavirus is creating major disruptions in the crude and base oil markets, driving significant price declines and unpredictable demand for both.
Adjusting costs to account for the impacts of IMO 2020 on Safety-Kleen represents a complicated picture because the company collects waste oil from more than 100,000 customers across North America, Linington told Lube Report in a phone interview. He noted the company considers the typical market factors when reaching a pricing decision. In the case of this increase, thats the starting point of where the customer is today, the competitive landscape in the various markets where we collect, and the cost to supply what we collect to our rerefineries, he explained. Those are the broad factors the company considers in determining where on the range of charge-for-oil price increases – from nothing to 70 cents per gallon – a customers increase would actually fall, Linington added.
He said the company estimates the total used motor oil market at about a billion gallons. About 40 percent of that collected waste oil is fed into the rerefining industry, he said, either to processing units that produce vacuum gas oil or to rerefineries such as Safety-Kleens, which ultimately produce base oil. Safety-Kleen operates base oil rerefineries in the U.S. in California, Indiana, Kansas and Nevada; and in Breslau, Canada.
We think the volumes or percentage of that billion gallon market could be as much as 40 percent of the total market that was going into either bunker blending or international industrial burning markets, he said. Our point of view was that those would be displaced by the surplus of high sulfur fuel oil available in the market post IMHO 2020, which would in turn create a surplus of used motor oil domestically. That would in turn drive the per-gallon value of generated waste oil down, on a holistic basis.
While acknowledging the impact of the coronavirus situation across the economy, he noted that in Safety-Kleens case, were fortunately not seeing that impact in the month of March as relates to collection volumes and base oil sales and inventory levels – time will tell.
The company said its Oil Plus+ customers, who purchase Performance Plus brand rerefined lubricants as part of Safety-Kleens closed loop offering, will be considered for exemption from the price change. We believe these rate changes are needed for Safety-Kleen to be fairly compensated for our collection services, Linington said in the press release, and to enable the company to continue to deliver service to more than 200,000 customers throughout North America.
Vertex Energys chief executive echoed some of the points made in Clean Harbors announcement. We have seen some impact from IMO 2020 directly related to the used motor oil supply chain, Vertex Energy CEO Ben Cowart told Lube Report.
In 2014, Houston-based Vertex acquired Heartland Group Holdings – owner of a used oil collection network and a 1,500 barrels per day API Group II rerefinery in Columbus, Ohio. According to Cowart, Vertex collects about 40 million gallons of used oil per year, and then relies on third party collectors for another 65 million gallons.
Cowart explained that used motor oil is priced off of high sulfur fuel oil. In the fourth quarter, as we were transitioning to IMO 2020, high sulfur fuel oil basically plummeted in value, compared to products that are benchmarked off of [West Texas Intermediate] or Brent Crude, like base oil or gas oil, he said. When high sulfur fuel oil trades at a deep discount to WTI, simply put, then used motor oil values come down with the high sulfur fuel index. At least thats how the markets have traded in the past for used motor oil.
He said the second impact that IMO 2020 has had on used motor oil values and demand relates to the United States having been a natural supplier of utility fuel for the last 20 years. He noted also that a lot of Russian and other European high sulfur fuel oils were produced at refineries from high sulfur crude and then sold to ships under the 3.5 percent fuel regulation or bunker fuel.
The fuel oils from those refineries got banned from burning on the ships, and then they had to go somewhere, he said. So theyve actually flooded the utility markets. That closed the arbitrage in the U.S. off. Where the traders arent blending high sulfur fuel oil blends to go to these utility markets, other than Mexico. Mexicos still a buyer, but other than that, theres not a lot of trading leaving the U.S. So in turn, theres much less demand for used motor oil than it was in the past. So its a supply and demand issue for used oil. And then its an index pricing issue.
Cowart noted that in the first quarter this year so far, high-sulfur fuel traded back up to West Texas Intermediate and tightened up. Thats because high sulfur is being used in the cokers as supplemental feedstock, where it was being burned in to ships prior, he added. So that helped the value of used motor oil, but the market and demand for used oil has not changed.
Clean Harbors announced in December 2014 that Safety-Kleen would eliminate its pay-for-oil program and replace it with either a zero-pay or charge-for-oil rate structure, citing adverse conditions in the base oil marketplace. That same month, Vertex said it would move to a service fee model for collection of used motor oil and environmental services starting in 2015.