Base oil production facilities are concentrated in a limited number of countries, while lubricant blenders are widely spread throughout the world; so, shipping capabilities and freight rates take on an important role in the pricing and trade flow of base stocks.

Demand for the shipping of chemicals, including the transportation of edible oils, is growing by a yearly rate of around 3 to 3.5 percent, while developments in the shale gas segment in the United States and the expansion of production capacities in the Middle East Gulf will [create] further demand for vessels, Maymi said. At the same time, the rationalization of older and uneconomic production capacities in Europe and Asia may reduce vessel demand, he added.

Unfortunately for many ship owners, profits have shrunk in recent years while operating expenses – which include crew costs, insurance, repairs and maintenance, stores and supplies, spares and administrative costs but not bunker fuel and capital repayment – continue to rise. For example, the operating expenses for a 19,000 deadweight stainless tanker were U.S. $7,400 per day in 2008 and climbed to $8,850 per day in 2014, according to Maymi. Deadweight tonnage is a measure of how much weight a ship can safely carry, and is the sum of the weights of cargo, fuel, fresh water, ballast water, provisions, passengers and crew.

Newer vessels offer significant cost savings compared to older ships, not only because the price of building the vessel itself is declining, but also because newer vessels have lower bunker consumption. Bunker fuel is the primary fuel oil used to operate ships, and it is one of the main costs that carriers incur.

Bunker consumption for a 19,000 dwt stainless steel tanker built in or before 2008, laden and running at 13 knots, is approximately 22 to 24 tons per day. Vessels built after 2014, operating under the same conditions, consume around 18 to 20 tons per day.

Ship building prices have also fallen. The cost in 2008 to order a 19,000 dwt stainless steel tanker built in Japan was U.S. $47 million. This cost is predicted to drop to around U.S. $34 million in 2015, according to Maymi.

While many suppliers rely on the spot availability of vessel space to transport their products, quite a few prefer to secure a vessel under a time-charter arrangement. Time-charter costs have also decreased in recent years. The hire of a 19,000 dwt stainless steel tanker averaged U.S. $19,000 per day in 2008 and U.S. $14,000 per day in 2014. Time-charters actually dipped to U.S. $12,000 per day in 2011, Maymi said.

The short-sea base oil market may face a space constriction because a large number of small vessels serving the Asian region will be retired in 2016 and 2017, as these ships turn more than 20 years old, Maymi explained. Fewer new small tankers below 19,000 dwt are on order.

This is partly because few shipping companies are covering capital repayments amid falling profits, and most new-build orders are for larger 19,000 to 30,000 dwt stainless steel tankers commissioned by certain investors for their asset value. Unlike ship owners, the aim of these hedge funds and speculators, in some cases, is to sell the ship before delivery, Maymi commented.

Shipping demand continues to track upward, but the global economic recovery is still very fragile, especially in countries such as China, where annual economic growth has slowed to 7.5 percent, below expected levels. Freight rates also remain volatile, making it difficult to predict how the price of base oils might be affected by this component in the future.

For example, freight rates were hovering near the mid U.S. $60s per ton for shipments of 5,000 tons from main ports in the Middle East to the Far East in January 2013. But rates have fallen steadily ever since to the mid U.S. $50s in June 2014. Similarly rates from the Middle East to India have fallen from the mid U.S. $40s to the mid U.S. $30s over the same time frame.

Rates for shipments from Ulsan, South Korea, to South China were near the mid U.S. $20s in January 2013. They jumped to around U.S. $30 per ton in March of that year but plummeted to below U.S. $20 per ton in May/June 2014.

Similarly, freight rates for 5,000 tons moving from Ulsan to Mumbai, India, were in the mid U.S. $60s in January 2013, but fell to the high U.S. $50s per ton by January 2014 and slipped to the mid-to-low U.S. $50s per ton in May 2014, according to Maymi.

However, Maymi expects several changes to occur within the shipping industry, including the consolidation of ship owners through mergers, pools and joint ventures – which will reduce competition – and he predicted that the eventual commoditization of the shipping industry could eliminate future freight spikes.