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High Drama on the High Seas


Business may be good, but sailing has not been smooth for the worlds shipping industry. Among the issues roiling their waters are several related to lubricants.

Like most customers who depend on lubricating oils and greases, ship operators have seen steep increases in prices for those products over the past two years. Cost, however, is just one of the problems. Operators have also encountered difficulty obtaining lubricants when and where they need them, and while a series of recent mishaps bears much of the blame, suppliers warn that buyers may have to get used to tight availability.

Shippers are also coming to grips with looming environmental mandates that focus on fuel but which have implications for lubricants. Lube suppliers say the first wave of regulations should not cause major disruptions. They add, however, that it is too early to discern the impact of stricter rules coming later this decade.

Heavy Weather

The second half of 2005 was choked with base oil and additive supply issues, which compelled marine oil marketers to declare force majeure. Those declarations were lifted around the beginning of this year, but shipping companies say lube availability continues to be problematic.

The lubricant suppliers say they are no longer in force majeure, said Simon Veldman, senior contract analyst in Rotterdam, Netherlands, for Stolt-Nielsen Transport Group, one of the worlds largest chemical shipping companies. However, we are still experiencing problems obtaining the [lubricant] volumes we need in some ports. In some cases, where lubricants were not available, we had to divert to a port that was not on our scheduled route. Obviously, that causes problems.

Ship operators also saw steep increases in the prices they pay, as did purchasers of most lubricants. Suppliers say those prices were primarily due to sharp increases in oil products and energy, as well as recent disruptions in raw material supply.

The latter began in March 2005, when an explosion damaged a Chevron Oronite plant in Singapore – the largest lube additive plant in Asia and a cog for Oronite, a major producer of marine lubricant additives. Five months later, Oronite issued a global force majeure declaration, stating it could not meet contractual obligations for most of its products because of growing additive demand and tight supply for raw materials. Oronite suffered another blow at the end of August, when Hurricane Katrina steamrolled past New Orleans, shutting down the companys primary North American plant in Belle Chasse, La.

A month later, Hurricane Rita choked base oil supply by closing four plants along the Gulf of Mexico with a combined 42 percent of U.S. paraffinic capacity. The market had just started to recover from the storm when it was rocked by fires at several plants in North America and Europe. This followed on the heels of two permanent plant closures in Europe last year. Observers say these disruptions hit the marine segment hard because of the big role Oronite plays – and because the market relies on heavy base oils, which were especially tight.

The cost of Group I base oils rose by 65 percent in 2005, whilst hurricanes, fires and unplanned incidents led to a major dip in supply, said Jill Nguyen, managing director of BP Marine Lubricants, who is based in Sunbury on Thames, U.K.

Current conditions appear to have created tension between marine lube marketers and their customers. Citing the tightness of supply, suppliers have urged shipping companies to enter long-term contracts, rather than trying to purchase on a spot basis. Industry sources say most big shippers do have long-term contracts – three years is typical – under which each vessel is supplied by one company.

But disputes have arisen recently over the question of whether these contracts cover new vessels. Ship operators argue they should, while at least some oil companies insist they do not. Sources say lubricant price and availability are both at issue. The conflict, which is still being contested, has taken on extra importance given the increased pace of ship construction and scarce availability of product. Lube marketers say they expect it will be several more months before the market recovers from the disruptions to base oil and additive supply.

Cinching Supply

The market also faces fundamental supply and demand trends that suggest tight availability could become the norm. Shipping activity is increasing to meet the demands of economic growth, and increasingly global trade patterns. According to a presentation by Vince Kyle at Februarys ICIS World Base Oils Conference in London, the industry has ordered construction of 5,000 new deep-seagoing vessels by 2009 – compared to an existing fleet of 48,000. At the same time, the rate at which operators scrap existing ships has dropped below 400 per year, its lowest level since the late 1990s.

The size of the globes fleet increased by more than 1,000 vessels last year, said Kyle, who is vice president of marine lubricants for Chevrons Fuel & Marine Marketing LLC in Houston, and he projected that it will continue growing, albeit at a slower rate. Moreover, new vessels have an average of twice as much carrying capacity as those being retired, meaning they require bigger engines and use more lubricants.

Bottom line: There looks to be a net addition to the worlds fleet – maybe around a net of 2,000 vessels over the next four to five years – with all [new] ships likely to be bigger in both cargo carrying capacity and also lube consumption than the vessels that are being scrapped, Kyle said. Hence the argument that marine lubricant demand will rise.

From its current level of 600 million gallons per year, he predicted global demand for deep-sea marine lubricants will grow at annual rates of between 1.5 percent and 4 percent over the next five years.

Supply of marine lube ingredients appears poorly positioned to keep pace. Base oil trends are against the market, as capacity continues to shift from API Group I to Group II and Group III stocks. Marine lubricants are formulated mostly with bright stock and other heavy Group I oils. Higher quality oils can be used, but capacity at Group II and Group III plants is weighted toward lighter grades, and they make no bright stock at all.

The bright stock issues may [become] a bit stickier in the event that more Group I capacity is closed over the next five years, Kyle said. As for additives, he added, Capacity utilization really seems to be at a maximum right now and … it suggests that additional de-bottlenecking or new steel in the ground is needed.

Kyle implied the long-term trends may result in chronic tightness in the marine lubricant market. Such a scenario would strengthen the position of suppliers, allowing them to focus on accounts and terms that they find most favorable.

My hunch is that the message on continued tight supply has not really gotten home yet, and owners will not really believe it until either supplies are interrupted again or the scope of service offerings from the suppliers, such as contract duration, technical service and ports of supply, becomes more selective, he said.

Lowering the Boom on Sulfur

Ship operators are also coming to grips with new regulations reducing sulfur levels allowed in marine fuels in some parts of the world. Around most of the globe, deep-sea vessels may burn fuel oil with sulfur content as high as 4.5 percent. This August, however, a limit of 1.5 percent goes into effect for the Baltic Sea, and is scheduled to extend to the North Sea and the English Channel during the following year. Territorial waters of Western Europe and the United States, as well as the Mediterranean, are expected to follow.

Where these rules take effect, ship operators have a choice of installing pollution abatement equipment instead of switching fuels. Observers say it is difficult to know what course the industry will take. Some abatement equipment was commercialized recently. Low-sulfur fuel is now available in some ports, but not everywhere it will be needed.

Industry observers expect ship operators will carry both low- and high-sulfur fuel, using the former only in waters that require it. This creates logistical issues, of course, which are still being worked out. It also has raised questions about the implications for lubricants. According to suppliers, some operators worry that the 1.5 percent limit will require new engines and/or lubricants.

Lube marketers say they wont, although operators probably will have to reduce feed rates for diesel cylinder lubricants when using low-sulfur fuels. However, 1.5 percent is just the first step in lowering sulfur content. The European Commission is considering a reduction to 0.5 percent in 2008, and a cap of 0.1 percent is scheduled to take effect in European Union ports at the end of 2009.

Oil companies say they cannot rule out the possibility of those limits forcing the introduction of new lubricants and new engines.

At 1.5 percent, its safe to use existing lubricant if you reduce the feed rate, Kyle said. When you start going much lower [on sulfur content], its hard to tell whether youll be able to use that same strategy. Were still in a theoretical stage.

Its another potential problem for shippers to consider as they chart the course of their business.

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