INSIGHT: Pressure likely to remain on Africa base oil demand

23 January 2013 17:39  [Source: ICIS news]

By Ross Yeo

A Lagos road during the Jan 2012 fuel strikeLONDON (ICIS)--Twenty twelve was a challenging year for the European base oil export market, with many key export destinations showing below par demand.

Among these were the three largest African markets, Nigeria, South Africa and Egypt, which, at various times and for various reasons, all imported less base oils than in previous years.

While much of this reduced demand for imports can be traced to macroeconomic factors - primarily the knock-on effects from the struggling eurozone – local factors were also in play.

How these local factors evolve could have an effect on the European base oil market, in particular the Baltic Sea export market, which is again currently facing low demand.

Nigeria, the largest base oil importer in Africa and therefore the market with probably the greatest influence on Europe, is estimated by traders to have shown 10-20% less demand than usual through 2012, with a number a reasons responsible.

In January 2012, the Nigerian government announced plans to remove a fuel subsidy, which would more than double the price of gasoline at filling stations. The effect was twofold.

First, widespread strikes in protest to the plans brought the country to a near standstill. With both vehicle use and industry rates at minimum levels, demand for lubricants, and therefore base oils, plummeted.

Second, although the government compromised in the face of the strikes, removing only part of the subsidy, the price of gasoline still increased significantly, eroding the disposable income of an already poor population.

“If your disposable income goes down, oil changes are probably not your highest priority,” said one European base oil trader with a specialist interest in Nigeria.

So even though the effects of the strikes have subsided, local demand for lubricants is probably still being undermined. Furthermore, the government is expected to follow through with its plan to fully remove the fuel subsidy, something which could cause a repeat of the 2012 scenario. With the next presidential elections in 2015, sources have speculated that the move could be made well beforehand in order to increase the likelihood of negative opinion dissipating before then.

Another, potentially longer-lived, factor undermining Nigerian demand is terrorism and sectarian violence. Sources say whole businesses and traders have vacated affected areas, particularly in the north of the country that was traditionally responsible for large chunks of total Nigerian base oil demand.

A third unpredictable reason impacting Nigerian base oil demand in 2012 was a longer than normal rainy season. This disruptive period, which in rural areas can render many roads inaccessible to regular vehicles, normally lasts from around July until September, but this year returned again in October for several weeks.

South Africa also suffered the effects of widespread strikes, this time in the second half of the year, with the most intense action concentrated around October and November.

One local trader estimated that base oil demand in October and November fell by 40-60% form previous months, while a blender said lubricant demand was down 50% year-on-year.

These decreases came when base oil demand had already slumped by as much as 20%, as a result of the struggling South African economy.

Rather than negative factors, Egypt’s decrease in base oil imports has been attributed to the restart in October of a 100,000 tonne/year brightstock plant, which had been offline for two years, according to a local producer.

However, it cannot be ignored that Egypt’s economy is not in a healthy state, and this is likely to have an eventual impact on base oil consumption if it hasn’t already.

While African demand for base oils is unlikely to be pivotal for European market health, it could nevertheless play a role.

The area of most probable impact will be of Nigerian demand on the Baltic Sea market. With prices in the Baltic, and indeed all of Europe, having fallen considerably throughout the fourth quarter of 2012, the Baltic market finds itself in a stalemate. Producers are fed up with selling base oils at such low numbers, often at a loss, and, having reduced their plant rates, are now beginning to offer material at premiums to published prices.

However, Nigerian buyers’ price ideas have yet to increase, and demand remains insufficient to justify these higher offers.

At present, very little business has been conducted out of the Baltic thus far in 2013, and the question remains, when will Nigerian demand recover?

By: Ross Yeo
+44 208 652 3214

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