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Rerefining Still Excites


Are the icy winds of global base stock oversupply likely to deter investors who want to build used oil rerefineries? Not yet, it seems. A number of new projects have recently unfurled on drawing boards around the United States and elsewhere.

Alabama Green Lubricants in January said it had secured financing needed to build a 32 million gallon per year rerefining project in Childersburg, Alabama. Ramki Srinivasan, CEO of the venture, says the company is working now to contract with existing used oil collectors throughout the South for its supply of used oil, much of which he now sees going into the lower-value burner market. The plant is targeted to be operational in mid-2014 and will license used oil processing technology from Chemical Engineering Partners, which produces API Group II base oil.

Dallas- and Calgary-based VeroLube is undertaking to build not one but two rerefineries. In both plants, VeroLube will be scaling up a proprietary, patented technology called ReGen. Unique to the ReGen process, it said, is that approximately 50 percent of the finished product is Group III base oil, without need for hydrotreating. It makes Group II as well, for a total base oil yield of about 75 percent. One plant will be in Bowden, Alberta, Canada, and have ability to make about 750 b/d of base oil, with the potential to double that capacity at some point. The second, larger plant will be on Houstons ship channel and have feed capacity of 4,000 barrels a day of used oil, and base oil capacity of 3,000 b/d. The Houston plant, too, could later be expanded.

Heritage-Crystal Clean continues to expand its rerefinery in Indianapolis. Work completed in last years fourth quarter brought the facility up from 50 million to 60 million gallons of nameplate input capacity. The expansion, along with a 94 percent capacity utilization rate in the fourth quarter, helped the company push 2013 revenues up to $283 million versus revenues of $242 million in 2012, according to its unaudited results. We expect to complete a further expansion to reach 75 million gallons by the middle of 2014, CEO Joseph Chalhoub reminded shareholders in a Feb. 21 earnings call.

Bucks County, Pa., is the proposed location for a used oil rerefinery called Lubricycle, which will include a hydrotreater, its investors say. With funding from private equity firm Capital Solutions, Lubricycle will purchase used oil and industrial fluids from various collectors and turn it into Group I and II base oils suitable for making new motor oil, the Blue Bell, Pa.-based company says. Capacity and cost have not been disclosed. Capital Solutions portfolio also includes CRS Reprocessing, a Louisville, Ky., recycling company that processes aluminum cold rolling oils and recovers drilling fluids for reuse by customers.

In November, Hydrodec announced a collaboration with Essar Oil to create an oil rerefining center at Essars fuels refinery in Stanlow, U.K. Two rerefining operations are envisioned, the first of which will process used electrical transformer oil through Hydrodecs proprietary process. The second will employ a new lubricant rerefining technology and will handle used general lubricants. The transformer oil section would be capable of processing around 27 million liters a year, and the lubricating oil side will process up to 100 million liters a year to make Group II+ and Group III base oils, all by 2016. (Although located at Essars refinery, the new plants have no connection with the Group I base oil refinery that Essar closed down in March 2012, an Essar spokesman said.) Feedstock for the plants will come in part from OSS, the U.K.s largest collector of used oil, which Hydrodec acquired in 2013.

Hydrodec already operates transformer oil rerefineries in Canton, Ohio, and Young, Australia. The Canton plant has been unable to process oil since a fire on Dec. 1, but Hydrodec last month received an initial $2 million payment from its insurer and is moving ahead to repair the facility and expand its capacity by 50 percent by year end.

Doubling Down

Given the myriad projects already under way, rerefining capacity will be doubling over the next five years, predicts Blake Eskew of the Houston strategy consultants IHS Purvin & Gertz. And thats based on actual commitments – not just on every announcement. It seems like every time you read Lube Report there seems to be another project announced, and not all will get completed, he interjected.

Eskew was speaking to a recycling industry meeting in California in November. Held by NORA, An Association of Responsible Recyclers, the event drew a record 450 attendees and 60 exhibitors (another sign that used oil recycling is still a hot draw).

Rerefining is not without risks, Eskew advised listeners, and foremost among them is a long, slow decline in its most precious resource: used oil. Expect about a 1 percent per year ongoing decline in automotive lubricant demand. Lube manufacturers have been moving up the quality chain from Group I to Group II to Group III. So the lube is better quality, and the used oil that is generated is better too. The task for the rerefiner is to take that used oil and turn it into a competitive base oil.

Meanwhile, virgin base oil supply is swelling, with every region adding Group II and III capacity. The Americas, Europe, Middle East and Asia Pacific each will gain about 40,000 barrels of daily capacity by 2018, Eskew said. U.S. virgin base oil supply is growing by 15 percent, from what is now 3.5 million gallons a year to 4 million gallons of capacity by 2017. So market pressure is about to become more intense.

Rerefining operations are poised for continuing expansion despite these issues, he reiterated, because many factors favor it. There are economic drivers, green initiatives, and the technologies are now more varied and competitive, so the technological risk is reduced, he said. Consumer acceptance of recycled oils was another risk, but that also has eased. Especially, resistance lessened in the Do-It-For-Me market, where the consumer is less involved in the decision about product selection. For these reasons, he believes that by 2017, about half of the used oil collected could go into rerefining, with base oil accounting for about three-quarters of the rerefiners output and fuels the rest.

Eskew finished on a cautionary note, saying new entrants face significant challenges. Its a difficult business. You need to have the capital and the organizational strength to turn a project into an actual plant. Undercapitalized players will have a very difficult time.

Getting Cloudy

Also speaking to the NORA meeting was Dan Cowart, CEO of Mobile, Ala., used oil collector and processor Aaron Oil Co. Theres a lot of interest in our industry now, more than in a long time. Where will we be in five years? Well, a lot of folks are not sure of where theyll be in the next quarter, he remarked, but the used oil industrys trends include more rerefining, for making base oils and VGO [vacuum gas oil]. The big challenge right now with rerefining is that base oil is oversupplied, and the forecast is for that oversupply to last at least to 2020. And when it comes back, the demand will be for Group III base oils, not Group I and II.

Beyond rerefining, more longstanding uses for processed used oil include as a high-value fuel, industrial-grade diesel, and in asphalt manufacturing. Rerefining to make VGO [rather than base oil] is another interesting market, Cowart mused. Some like it because it puts the decision back on the virgin refineries, whether to make diesel or fuel oil or base oil.

Used oil that goes into the industrial burner market is seeing competition now from natural gas, he continued, but for 2014 and 2015, some foresee natural gas prices could go back up. There are a lot of curves to watch – natural gas prices, base oil capacity, WTI crude costs, fuels prices.

In the end, he forecast, many rerefining facilities wont make it. Due to rising costs and lower prices for their base oil, theyre seeing margin compression. Existing facilities will make incremental investments to stay viable. And in the long run, margins will fluctuate – but they will continue to be incremental for many.

Before things can get better, Cowart added, the starting price paid for used oil will have to come down at the street level.

Cost Hurdles

The high cost of used oil is a charged topic for both collectors and rerefiners, especially as base oil prices have lost ground and margins narrowed. The largest player in the United States is Safety-Kleen, which was acquired in late 2012 by Clean Harbors Inc. Safety-Kleen had expanded capacity in recent years at its plants in East Chicago, Ind., and Breslau, Ontario, and makes Group I and Group II base oil and also blends lubricants. Its rerefining segment had enviable revenues of around $650 million in 2013.

However, base oil market conditions are very poor for everyone right now, and that includes rerefiners, Clean Harbors CEO Alan S. McKim told market analysts at the Needham Growth Conference in January. Since June 2012, base oil prices have shed about a dollar per gallon, crushing margins, he noted.

Since acquiring Safety-Kleen, Clean Harbors has focused on integrating it into its other operations; that included identifying 500 specific projects where cost synergies can be reaped, McKim reported. Included were head-count reductions, centralizing back-office functions such as IT and procurement, and bringing in-house some transportation and waste disposal jobs that had been handled by outsiders. Altogether, these efforts trimmed $70 million in costs during 2013, and are projected to show a solid $100 million in savings during 2014.

Safety-Kleens margin was about 12 percent overall, said Clean Harbors President and CFO Jim Rutledge, and the goal is to nudge that up into the 20 percent range within three to five years. To do that, said McKim, Safety-Kleen will also increase its output of higher-value blended products, to help offset the pricing pressures on the base oil side. As well, we need to control what we pay for used oil, McKim emphasized.

Safety-Kleen handles an estimated 200 million gallons of used oil a year, roughly one-fifth of whats collected in the United States and Canada. And with the addition of Evergreen Oil, the Newark, Calif., rerefiner that Clean Harbors bought out of bankruptcy last year, no one has our footprint on a national basis, McKim said. On a regional basis we expect to see further consolidation, starting with the highly fragmented used oil collection business.

McKim also promised that Safety-Kleen will take a leadership role in lowering the price we pay for used oil. Used oil is actually oversupplied at this point, he asserted, and given that the burner market has a cheaper alternative now in natural gas, used oil prices are overdue to soften.

Committed to Change

Heritage-Crystal Clean founder and Chairman Joe Chalhoub echoed that sentiment in his Feb. 21 presentation to shareholders. Conditions in the used oil industry have been challenging for over a year. The industry has failed to control collection costs and to bring down prices paid to generators in parallel with the declining value of recycled oil products.

The published spot market prices for the type of Group II base oil we sell decreased by approximately $1.14 per gallon from the first half of 2012 through fourth-quarter 2013, Chalhoub went on, yet used oil street prices are largely unchanged. Heritage-Crystal Clean is committed to changing this, he vowed. Starting in March, we will take constructive steps to reduce the prices paid for used oil. Tactics will include tighter controls at the street level, deeper focus on collection route efficiencies, and price-tracking tools that will support representatives and branch managers in their negotiations.

The winds for both rerefined and virgin base oils eventually will shift to blow from a more favorable direction, but that may take years, Chalhoub said. Market prices for all base oils have not shown improvement yet this year, and he doesnt expect much from that quarter. The base oil price decline seen in fourth-quarter 2013 will continue, and will be a headwind for us in 2014. He doesnt expect any relief in pricing this year or, for that matter, for the next couple. At todays prices, a lot of players are suffering.

Given this cooling climate, should anyone build a new rerefinery? Short-term, its difficult to justify a grassroots facility, Chalhoub told investors. However, adding incremental capacity as we are now doing is something we will continue to look at positively.

McKim also doesnt see a bright future for the various rerefineries announced or currently going through the permitting process. One, he noted, has already been halted for lack of financing, and many others will not be constructed. Its economically not feasible to build a greenfield facility today. We dont expect to see many new plants built – economically it just doesnt make sense right now.

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