Midterm Review Unlikely for Group II Quota

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It is unlikely that the European Commission will review the new duty-free API Group II base oil import quota that it adopted late last year, according to industry sources. The quota has caused confusion around the industry regarding its enforcement and led to increased costs for companies.

The new policy, which came into force Jan. 1, allows 400,000 metric tons of Group II per year – split into two 200,000ton semestral amounts – to enter the European Union without a 3.7 percent duty. The quota applies to Group II oils between viscosity grades of 150 neutral and 600N. Lighter Group II grades and Group III base oils are still exempt from duties.

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When the measure was adopted last November, the commission made a small concession of sorts by stipulating that the quota may be reviewed after six months. Usually this only happens after a year, a source told Lube Report at the time.

But the window of opportunity for a mid-year review seems to be narrowing, as sources say the next round of talks on the matter wont be for another few months, leaving little time for negotiations before a reevaluation would take effect on July 1.

Secondly, the European Commission wants to base its decision on customs data, the same sources say, which wont be available for some time. All the while, market data indicates that European demand for Group II is far greater than local production capacity, stoking complaints that the quota is too low and will increase costs for some lubricant blenders.

A number of European countries and lubricant industry associations, most prominently the Independent Union of the European Lubricants Industry, had argued for quotas of between 700,000 t/y and 1 million t/y before the final decision was made.

Brexit is complicating matters for those EU member states and national associations pressing for a higher quota. The United Kingdom Lubricant Association had pressed for a 700,000 t/y quota, but the United Kingdoms membership in the EU was downgraded to observer status Feb. 1, meaning it lost its right to vote on the matter.

The policy attracted widespread attention within the industry when it was adopted in November, but its impact has still caught some companies by surprise.

Contrary to what we were expecting, we ended up paying a duty in January, Paul Kerwin, base oils account director at Multisol-Brenntag, told Lube Report.

The way the process works is that you immediately pay a duty when you import. Upon payment, the goods are released while the money is put in a holding account. The problem is that we do not know if or when this money will be released – it depends on imported volume status, he explained.

Kerwin added that it is presently unclear how Group II imports are collated and counted in the system, or in other words, how the purchases are assessed.

As a result, a lot of finished lubricant blenders now face increased raw material costs. This comes as the market also sees increased competition for base oil feedstock due to the IMO 2020 marine fuel regulations, which makes for a twofold impact on costs.

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