Q&A: IMO 2020 mixed bag for carbon black market

Vincent Guercio is the president of CTC International, a petrochemical consulting company, and editor of CBO (Carbon Black Oil) Monitor. Tim Bart owns Carbon Management International, a coal tar chemical consulting company, and serves as co-editor of the publication. In this Q&A, edited for length and clarity, Guercio and Bart discuss the effects of the International Maritime Organisation (IMO) 2020 global marine fuel regulation on the carbon black and the carbon black feedstock markets. The two responded jointly to emailed questions.

How will carbon black producers and consumers be affected by the increased availabilities of high-sulphur (HS) residual fuel oil in 2020?

Those carbon black (CB) producers that can use HS slurry as a feedstock will have an advantage because prices will be depressed after 2020 until the HS fuel oil market becomes more balanced.

The US EPA (Environmental Protection Agency) made agreements with carbon black producers to reduce their plants' sulphur oxide (SOx) emissions, and some are installing scrubbers so that can continue to use HS slurry.

US carbon black plants were grandfathered into the Clean Air Act and were not bothered much until about ten years ago when the EPA began negotiations with the carbon black producers to lower their feedstocks' SOx, nitrogen oxide (NOx) and particles emissions. During 2013-2017, all five US carbon black producers reached consent decrees with the EPA and agreed to install equipment such as scrubbers or process lower sulphur feedstocks after 2020.

There are 15 US carbon black plants. Six have agreed to limit the sulphur content of their feedstock to the 1.5-2.8pc range. One plant recently installed a SOx scrubber. And the remaining eight plants are also required to install scrubbers.

Historically, many CB producers and consumers have based carbon black feedstock and carbon black prices on HS residual fuel oil prices assessed for Houston, Rotterdam and Singapore. Nearly all, 97pc of US carbon black feedstock is slurry oil and refiners producing low-sulphur (LS) slurry are currently changing their price indexation from 3-3.5pc sulphur residual fuel oil to 0.5pc sulphur residual fuel oil or to LS crude.

Why are refiners supplying LS slurry for carbon black feedstock using 3-3.5pc sulphur fuel oil for price indexation, instead of using 1pc sulphur residual fuel oil for indexation?

Until around ten years ago, US 1.5-2.5pc sulphur carbon black feedstock prices were indexed using a weighted average of US Gulf 1pc and 3pc sulphur residual fuel oil. Then major US utilities, especially in Florida, reduced LS residual fuel oil purchases and then quit oil completely as much cheaper shale gas became available. Gulf Coast LS residual fuel oil was no longer an active market and assessments were unreliable, so carbon black oil sellers moved completely to the HS residual fuel oil indexation which was still a liquid market.

For LS carbon black feedstock, refiners are looking at 0.5pc sulphur residual fuel oil and LS crude oil as indexes because HS fuel oil demand will decline drastically due to IMO 2020. They believe the HS resid market will remain liquid but with depressed prices that will slowly recover somewhat during 2021-2024. Many foreign LS carbon black oil suppliers hope to move to regional 0.5pc sulphur fuel oils as indexes and at least one European ethylene tar supplier has begun using 0.1pc gasoil posting.

Will the increased demand for low-sulphur (LS) residual fuel oil for bunkering have an affect on carbon black production?

Many inland US carbon black plants have traditionally been supplied with LS slurry by pipeline, rail and truck. They will experience higher costs as indexing is moved from HS fuel oil to LS fuel oil or LS crude.

Four of the 15 US carbon black plants have pipeline feedstock supply and those are next to the refinery source because slurry is difficult to pipeline. While those local refineries were the sole or major feedstock sources originally, this is no longer true. As these plants expanded and the refineries minimized slurry output, more outside feedstock was needed via rail and truck. Only a couple of the inland carbon black plants can receive feedstock by barge and many of the good HS slurry sources use barges and cannot load rail cars or trucks.

The US carbon black plant, which has already installed a SOx scrubber, is currently having some difficulty obtaining HS carbon black feedstock due to logistics. In addition, the metallurgy of the plant was not taken into proper consideration when installing the scrubber. The plant was originally designed for a LS feed and can cannot handle the HS feed. Thus, even though the plant has a scrubber the producer has to make additional investments to reconfigure it.

Slurry oil, coal tar and ethylene tar are used as feedstock to make carbon black. How will IMO 2020 affect these markets?

China produces 43pc of the world's carbon black and its carbon black feedstock is essentially all coal tar. Other carbon black feedstocks include slurry oil and ethylene tar.

Slurry oils have 0.2-5.0pc sulphur and must meet density, ash content, viscosity and several other carbon black feedstock specifications. Most US carbon black feedstock exports are Panamax slurry cargos, of about 65,000t, obtained by blending oils from several sources to meet a 3pc sulphur maximum carbon black feedstock specification. These feedstock cargos are generally blend of LS slurry and 4-5pc sulphur residual fuel oil. So IMO 2020 will have effect on from both sides: higher LS fuel oil pricing and lower HS fuel oil pricing. If LS crude oil pricing is constant, this averaging effect should result in smaller future change in HS carbon black feedstock export pricing.

Coal tar is not blended into bunker fuel due to compatibility and/or stability problems, but it is sometimes used neatly as industrial and utility fuel oil. Coal tar oils generally contain 0.4-0.7pc sulphur and are used as carbon black feedstocks extensively in the EU, Russia and China. EU and Russia also use some slurry and ethylene tar with prices indexed to Rotterdam 1pc sulphur fuel oil postings. But they are likely to move to the new 0.5pc sulphur fuel oil assessments or to Brent crude oil, which should give them higher future pricing. China is different because over 99pc of its carbon black feedstock is coal tar based so pricing depends on supply/demand which is heavily influenced by the steel and aluminum markets as well as by some fuel oil pricing.

Ethylene tar generally contains 0.05-0.1pc sulphur, but there is also some with 0.5-1.5pc sulphur. Ethylene tar is used as carbon black feedstock mainly in Europe, Russia, Japan and Taiwan. Although ethylene tars should not be blended into the fuel oil pool due to compatibility and/or stability considerations, some is occasionally used. Bunker contracts prohibit "chemical waste" being used and some market participants consider the byproduct ethylene tar as such. There have been several instances of ethylene tar blended into marine fuel oil causing severe problems for vessels using the product.

Which were the main countries that produced carbon black in 2018? Which were the main companies that produced it?

In 2018 world carbon black production was about 13.3mn t. The main countries were: China, 5.7mn t; US, 1.6mn t; Russia, 1.0mn t; India, 0.8mn t; Japan, 0.6mn t; Korea, 0.6mn t and the rest of the world, 8.7mn t. In 2018 world carbon black production capacity was about 16.7mn t per year.

The major companies producers were: Cabot, 2.1mn t; Birla, 2.0mn t; Orion, 1.2mn t; Black Cat in China, only 1.1mn t; Tokai Carbon, 1.0mn t; China Synthetic Rubber, 0.8mn t; Phillips CB in India, only 0.5mn t; and Omsk Carbon in Russia, only 0.5 mn t. All are global producers except for the three regional companies noted.

Are there specific regions where the carbon black producers will be especially hindered from IMO 2020? Is there something they could do in 2019 to soften the blow from IMO 2020?

IMO 2020 should affect European, Russian and Brazilian carbon black producers more because they currently index carbon black feedstocks pricing to 1pc sulphur fuel oil and might be pressured to use 0.5pc sulphur fuel oil and LS crude postings.

China should be affected the least because it uses domestic coal tar which is mainly priced according to supply/demand within China. India, southeast Asia and Africa should be favored because they use 3pc sulphur carbon black feedstocks imported from the US which is priced according to HS residual fuel oil with some blending influence from LS residual fuel oil. North America uses both LS and HS slurry oils so those plants should have mixed effects from IMO 2020.

To soften the blow from IMO 2020, any carbon black plant using LS carbon black feedstock should install a SOx scrubber and switch to HS carbon black feedstock if it is available logistically and economically.

The US exported 2.5mn t of slurry carbon as feedstock during 2018. HS slurry exports went to: India, 1.1mn t; Thailand, 0.5mn t; and Egypt, 0.3mn t. Italy took 0.2mn t of 2pc sulfur slurry. Korea and Japan received a combined 0.2mn t of 1pc sulphur maximum slurry mainly from the US West Coast.

How will IMO 2020 affect spot versus term carbon black contracts trade?

Smaller carbon black consumers usually buy spot. Carbon black is sold to tire companies and large rubber goods companies under annual contracts in each country or region which are usually extended year-to-year.

The carbon black sales contracts have formulas with a base price that is adjusted according to fuel oil or slurry pricing. Where natural gas is used as fuel, there is generally a gas price adjuster also.

IMO 2020 will increase carbon black pricing for those producers using LS carbon black feedstock and will decrease pricing for those using HS carbon back feedstock.