INSCX, which is based in Aderley Edge, United Kingdom, began as an online exchange for nanochemicals, a relatively new category of materials finding their way into lubricants and other products. In response to requests, INSCX initiated a platform for the Turkish market and allowed base oils to be listed as an adjunct. Buyers and sellers are now using the website to list volumes being offered or sought.

Base oils have many features in common with other traded specialties, including excessive price volatility, over-reliance on price referencing, a dearth of reliable trading data and limited ability for suppliers and end users to hedge against price fluctuations.

There is good rationale for Turkey to have been an initial focus for the base oil exchange. The Turkish market has a particularly large number of base oil purchasers, sellers and resellers because it exports an unusually high portion of lubricants, in addition to having significant domestic consumption. This means the market has many blenders who need lots of base oil.

Some of these market players learned of INSCXs exchange and enquired about the possibility of listing Group l base oils. INSCX acquiesced, and for the first time to this writers knowledge, base oils had a commercial platform that afforded flexibility to the trading of these fluids.

The basic function of an exchange is to provide a neutral and fair market that helps participants identify availabilities and prices most favorable to them. A producer, of course, will normally wish to sell at the highest possible price, while a buyer will prefer to buy at the lowest price. That may seem simple, but circumstances can keep those interests from meeting to consummate transactions – a lack of knowledge about going prices in the market or uncertainty about whether a would-be trading partner truly possesses the resources or qualifications expected to complete a transaction.

The exchange, then, can help end standoffs between buyers and sellers by providing information and establishing a balance between the tolerance of buyers and sellers.

For example, should a producer wish to sell a base oil cargo at, say, U.S. $850 per metric ton, then a buyer expecting to buy at $800 per ton must be prepared to meet somewhere in the middle and hope the seller will adopt a similar position, or no trade can be transacted. Equally, a seller offering product at, say, less than $800 per ton must first satisfy the exchange they have title to such a cargo before the offer can be listed. In these ways, the exchange system will end the charade that can plague buyers and sellers and which some must battle weekly as they try to secure accurate price information.

Some individuals might have misgivings about such an exchange, feeling that it results in prices that are unfavorable to their interests. But the exchange does not set prices; it merely broadcasts prices as instructed by buyers and sellers, listing numbers that they freely choose against a realistic assessment of where the general price is.

At present the exchange lists Group I and Group II base oils originating on the Baltic and Black seas and delivered to Turkish ports. A logical next step would be to add listings of Group III grades in order to help provide a continuum of order. The format could also easily be extended to other markets and even globally if interest in such a mechanism evolves.

Other features of the exchange can be summarized briefly.

Listings are reported on a nominee basis, meaning that they identify a merchant nominated by the commercial user to receive inquiries from interested parties. The actual identities of the buyer and seller remain anonymous to everyone except the merchant and the opposing party to the trade.

The exchange lists prices on completed transactions – without identifying participants – to provide a gauge of where prices stand.

The exchange operates a central clearing system using a series of segregated client accounts held with an approved European prime bank. Buyers and sellers can use this system to achieve lower costs for confirmed trading. Buyer funds are held on deposit and then are allocated immediately upon performance by the seller. This puts an end to the incessant delays caused by reliance on commercial paper such as expensive Letters of Credit. Letters of Credit may still be used, for example, where exchange controls exist within a country, with buyer and seller first agreeing on a bank to hold the purchasers funds in escrow and to issue a document confirming as much, along with the terms and wording of a transaction. Bank charges for such services have increased in recent years, so the potential savings is significant.

A trade is classed settled when supply is met with payment and title transferred at point of sale. Where the INSCXs client system is used, the exchange will instruct an independent inspector acceptable to both parties to conduct a loading inspection, which will trigger release of funds.

Forward dealing, or hedging, is possible with the exchange acting as a buffer between supplier and buyer. To complete a hedge transaction, the exchange would effectively purchase forward quantities from sellers and resell to receivers over a nominated period.

The lubricant industry has a long running debate about whether base oils are specialty products or commodities – whether products from different suppliers have significantly different performance properties or are uniform enough for price to be the primary purchasing criteria. Base oil transactions through an exchange like INSCX would seem to support the commodity argument since offers list price but not source. On the other hand, cargoes can be listed by API category or viscosity grade, so perhaps the debate continues.

What the INSCX exchange may accomplish is showing the industry how base oils might be traded on an open market platform providing a free flow of pricing information and the convenience of trading services. It will be interesting to see if this is of value to the industry.