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Base Oil Report: Trends

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Base Oil Report: Trends
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Brexit Outcomes

The U.K decreed that it would finally leave the EU on Jan. 31, 2020. This date would allow for a transition period of eleven months, during which both the U.K. and the EU would negotiate a trade agreement under which the continuance of commercial exchanges between the two partners would be honored. This transition was difficult to negotiate, both because of timing and the content of the agreement.

During the negotiation period, another specter reared its head: Enter COVID-19. The added complexity of remote negotiations between the two parties did nothing to improve matters. Time was running out and the U.K. was threatening to leave the EU in Dec. 2020 under World Trade Organization terms should no firm agreement be reached.

At the final hour, a free trade agreement was finalized, albeit with caveats. The EU was given dispensation by the U.K. for each EU member state to ratify the deal. At the time of writing, the EU had still not ratified the agreement and had been granted an extension by the U.K. until the end of April. 

Brexit is causing many issues for import and export procedures, even against the backdrop of a free trade agreement, which should have maintained the status quo in terms of movement of goods between EU and the U.K.

There have been necessary changes to customs documentation and cross-border checks on goods that had to be overcome. Whilst some teething problems were to be expected, unpredicted bureaucracy from both sides has led to holdups of the free flow of goods between the two neighbors. Lubricant exporters, for example, are now being charged extra processing fees by freight forwarders and agents to handle the required paperwork to import and export base oils, finished lubricants and additives.

Border controls and clearing first impacted the scene with delays of a few days incurred by traffic on short sea routes for truck-loaded materials. These delays were largely anticipated and have been lessened by new electronic clearance systems.

David Wright, director general of the United Kingdom Lubricants Association, cited a particular example where, because of potential delays, U.K. vehicles were loading on the first available sea crossing to the continent, armed with paperwork that stated “Dover-Calais.” When trucks were loaded onto an earlier vessel moving between Dover and Dunkirk, for instance, they were forced to undergo primary checks due to the arrival port being “incorrect,” even though the entry was made through the same country within the EU bloc. Shipping documents are now being amended to list a variety of routes. 

Certificates of origin attached to imports of base oils are extremely important, since the U.K. and EU free trade agreement states that only products originating from either entity will qualify for free trade customs clearance. In other words, no duties or tariffs would be applied to these goods. 

Therefore, if base oils and additives are purchased from EU sources, the two constituent parts are then blended in the U.K. to produce a finished lubricant, and that product is exported to EU, then it qualifies as a free trade deal. 

However, if the same two parts are imported into the U.K. and are packaged into smaller quantities, such as cartons, drums or barrels, it does not qualify as U.K. origin product and would be subject to EU import tariffs. Work that one out!

One development in API Group II base oils has transpired since Brexit on Jan. 1. U.K. buyers of Group II grades produced in Rotterdam may import these oils without duties or tariffs, and supplies of Group II produced in the U.S. may also be imported into the U.K. duty-free, these imports being conducted under the U.K. Global Tariff arrangements.

Blended lubricants using base oils from either source are currently deemed free of tariffs under a U.K. temporary suspension.

The U.K. continues to enjoy free trade agreements with former EU FTA partners such as South Korea, Singapore and Japan. One concern expressed by the United Kingdom Petroleum Industry Association is that without a U.K. Global Tariff schedule, trading could be open to cheaper imports of petroleum products, which could undermine U.K. production of fuels, base oils and bitumen. Whilst only one refinery in the U.K. produces Group I and Group III base stocks, this could have a longer-term effect on the viability of this and other plants in the U.K.

In last month’s column, Manfred Jungk touched on the complications that could ensue under existing REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) arrangements. The U.K. has essentially copied the EU REACH directive in terms of data requirements and registration. The plan is for U.K. companies to register under a new U.K. REACH program before the fourth quarter of this year, but in doing so corporations and smaller companies may have to incur further registration fees for this legal requirement. These costs are not insignificant.

This may be a real impediment to new investment in the lubricant and chemical industries in the U.K. and is being addressed at the highest level of U.K. government and in ministerial circles.

Brexit is upon all of us and has not come without cost. Some of these costs were anticipated, and whilst there may be good economic reasons to look forward, there still exist anomalies that have started to figure into the day-to-day commercial arrangements between large companies and small and medium enterprises based in the U.K. and EU.

These areas are steadily being addressed and hopefully will be resolved in time. But simplifying arrangements wherever possible and taking a practical approach to solving some of these problems still seems to be something for the future.  


Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Send him comments or topic suggestions at pumacrown@email.com.

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