When I talk to people not directly involved in buying and selling of base oils, they often ask about the margins made by traders and resellers. The short answer is that an average cargo shipment may yield a margin of U.S. $10 to $20 per metric ton. This would be the gross margin to a trader – the difference between the sales price paid to the supplier and the purchase price paid by receiver. From that margin the trader still must deduct items such as bank costs, inspections, overheads and occasionally demurrage in order to arrive at his net profit.
But the posing of this question brings to mind a particular episode that occurred some years ago and which involved a shipment from Morocco to the United Arab Emirates. Fortunately for our industry, this trade was very atypical.
During the late 1990s, trader opportunities were more abundant, with many producers content to sell base oils on an FOB basis – meaning loaded at the refinery – as long as they were not intended for domestic blenders, which the producer supplied directly. Thus export markets to deep-sea locations – few of which produced base oil at that time – were open to established traders.
One such cargo was being offered for sale through a Switzerland-based trader. Consisting of some 4,000 tons of solvent neutral 150, solvent neutral 500 and bright stock, this cargo had been bought from a producer in Morocco and was offered on an FOB basis. Subsequent interest was taken up by a U.S. trader who was looking to fulfill a commitment to receivers in Sharjah, U.A.E.
Facilitated by a third party, an agreement was reached whereby the cargo would be sold FOB to the U.S. trader and shipped to Sharjah to be received by blenders in that area. The margins were expected to be tight due to the number of players appearing in the deal, so every possible savings was sought. The freight angle was obviously a critical element; the cheaper the cost of chartering transportation, the better.
A ship appeared on the horizon offering a rate significantly lower than any other proposed vessel. It was said that this particular vessel was an older lady, and that the owners wished to reposition it in the Middle East Gulf due to lack of business for it in Europe. Since the ship carried no approvals it was less than likely to be chartered by any of the major players in the latter arena. The ship was operated by a Greek company under a flag of convenience and seemed to have officers and crew members of almost every nationality.
The ship was chartered by the U.S. trader, who nominated it to the Swiss counterpart, who duly repeated the process to the refinery. Since the refinery did not have a vetting system and would accept almost any vessel to load FOB, the ship was accepted by all and the necessary paperwork put in place. The ship operator submitted an acceptable laycan – a schedule starting with the day on which loading would commence and ending with the last acceptable date for it to arrive at its destination – and the story began to evolve.
The vessels previous cargo was molasses – not the best to precede a base oil shipment – and upon arrival in Morocco an independent inspector refused to allow the loading to proceed because it still reeked of molasses. Every tank, line and hose was contaminated with a sweet-smelling, sticky coating. It took 11 days and some creative cleaning before the inspector relented on the fourth inspection.
The fact that the ship did not have all necessary certification on board caused a further delay of some seven days before it was loaded and set sail for its next reference point, the Suez Canal. Twelve days later it had not appeared and charterers as well as Sharjah receivers raised concerns about the delays. The vessel finally transited Suez, but then again took much longer than expected to arrive at the Yemeni port of Aden.
At that point it was discovered that the vessel was steaming at an average of around 4 knots per hour – much slower than the norm, which is 10 to 12 knots per hour. Apparently the ship lacked a seaworthiness certification and therefore could only travel within coastal waters which forced it to maintain a distance of 20 sea miles from the coastline. In addition, the main engine had stopped working due to the lack of bunker fuel on board, so it was being propelled only by auxiliary engines. This explained the transit time to Suez.
The vessel broke down off the coast of Oman, causing a further delay of three days. By that point, frustration had turned to anger from both charterers and the receivers, who were urgently awaiting the arrival of the cargo. Legal papers were drawn up and representations were made to the vessels owners and insurers.
Some seven weeks after the debacle began, the vessel arrived at Sharjah port where it was discovered that the cargo had not been heated due to the lack of bunker fuel. Because it is so thick, bright stock is normally heated during transit so it can be unloaded in a reasonable amount of time. This failure would have made discharge extremely slow, but it turned out to be immaterial because, before discharge had begun, the vessel was arrested for not paying for fuel provided by a bunker supplier three months earlier.
A friendly agent was employed to look after the vessel in the port, but then two of the crew jumped ship and disappeared while the vessel was under arrest. This plus a failure to lodge funds with the agency caused great pressure to personal friendships between the agent and the charterers. The receivers were leaping up and down because a lack of base oil in their tanks prevented them from blending on behalf of their toll customers, which included some of the major suppliers to the marine lubricants industry. In addition, the receivers, in accordance with the terms of their letter of credit, had paid for the cargo 30 days after the bill of lading date – another source of significant annoyance.
The vessel was towed from its berth and placed under detention by the port authorities in Sharjah. Fourteen days later, it was allowed to return and the cargo was slowly discharged into receivers tanks.
So what does this story have to do with margins? One might assume that the costs of this disaster more than wiped out the thin margins that were anticipated in the beginning. In fact, this cargo ended up ranking among the most profitable undertakings for all parties concerned. The final scores can be totaled up as follows.
The refinery presumably made approximately $20 per ton on its sale to the Swiss trader. The Swiss trader, due to timing and availability, back-to-backed around $45 per ton. The U.S. trader made in excess of $25 per ton on the sale to the receivers. Key to the final analysis, the receivers eventually came around to the fact that prices on the base oil market had moved up by some $20 per ton since the vessel sailed from Morocco, allowing them to improve their margin for converting this cargo into finished lubricants by $40 per ton.
A total of some $130 per ton, or around $520,000, was shared by all parties involved in this disastrous voyage, which goes to prove that out of something awful, a positive element can be found. Suffice to say that not many deals before or since have yielded such margins, nor gone so wrong.