Following the European Commissions adoption last month of a quota on duty-free API Group II base oil imports, industry sources say the measure is already stirring the European market with concerns that the threshold is too low.
Starting Jan. 1, the new regime will allow 400,000 metric tons of Group II per year to enter the EU withyout paying a 3.7 percent duty that applies to petroleum products. The quota will be split into two 200,000 ton semestral amounts, to be counted on a first come, first served basis without additional cost. The quota applies to Group II oils between viscosity grades of 150 neutral and 600N. Lighter Group II grades and Group III base oils will remain exempt from duties.
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We dont have a lot of experience in importing under a semestral quota. Because it is first come, first served, it is not a straightforward calculation, Paul Kerwin, base oils account director at Multisol, told Lube Report.
Current market data indicates that European demand for Group II is far greater than local production capacity, giving rise to complaints that the quota is too low and will increase costs for some lubricant blenders.
The regions two biggest domestic sources for Group II production are ExxonMobils new Rotterdam facility with 1 million metric tons per year of production capacity and a Spanish joint venture between S.K. Lubricants and Repsol with capacity to make 186,000 t/y of Group II. A few smaller rerefineries also produce the grade.
Demand is much higher than local supply and the duty-free quota combined, therefore we think it is inevitable that some Group II will be imported under duty and that this will have a cost impact on somebody, somewhere, said Kerwin.
Speaking on the condition of anonymity, a person familiar with the matter told Lube Report that the commission made a small concession of sorts by stipulating that the quota may be reviewed after six months. This is very positive and particularly important for small- and medium-sized enterprises. Usually this only happens after a year, he added. The quota should be 500,000 to 700,000 tons at the very least, and ideally at a level of 1 million metric tons per year, he concluded.
A number of European countries and lubricant industry associations had argued for quotas of anywhere between 700,000 t/y to 1 million t/y before the final decision was made.
The quota makes the ongoing transition in the European market from Group I to Group II base oils – driven by technology upgrades such as the ACEA 2016 European oil sequences and upcoming ACEA 2020 sequences – more costly for businesses. External factors such as the impending IMO 2020 regulations are expected to add momentum to this transition.
The technical upgrade in ACEA 2020, the change in emission legislation and the increased technical performances of lubricants [all require] Group II and Group III base oils, said Kerwin. It is our view that the market needs [unfettered] access to sustain the technology upgrade. Blenders should not be penalized on cost for making this technology upgrade to support enhanced performance of lubes from an emissions perspective. He added that while the quota doesnt put a brake on the transition to Group II and Group III, the lower volume will put a price on it.
Multisol urges all interested parties to contact their national authority should they have any concerns about Group II quota levels, especially since quota levels can be reviewed every six month by the EUs Economic Tariff Questions Group.