Oleochemical rebound but outlook cautious for 2011
25 Jan 2011 - 2010 saw a healthy oleochemicals market, but rising feedstock costs pose a challenge for 2011
The oleochemical market, even glycerin, saw a significant improvement last year in terms of demand and operating rates compared with the 2009 slump.
The fatty acids sector, often seen as an indicator for the economy, saw improved worldwide demand, while fatty alcohols, which were predicted to be oversupplied because of huge Asian capacity rises in the past few years, was anything but in 2010, notes Norman Ellard, director of Singapore-based consulting and trading company Rohen. "Likely estimates of average capacity utilization would be 85% in fatty acids and closer to 90% for fatty alcohols, not including some unplanned shutdowns in the industry," says Ellard. "Market growth was healthy, driven by rapidly increasing demand in the large growing economies of China and India."
Many attribute the demand turnaround to the broad global economic recovery. Demand for most chemical products last year was substantially ahead of 2009, particularly in the automotive sector and even in residential construction, says Neil Burns, managing partner for US-based consultancy Neil A. Burns.
"Oleochemicals was no exception with demand being pulled through the value chain by the detergents, personal care, industrial, food and fuels market," he notes.
Demand was also fueled by low inventory levels early last year, says Klaus Nottinger, managing director of Germany-based OleoConsult. Some consumers even refilled beyond their usual orders because of lower prices in early 2010. "It is fair to believe that all oleochemical companies returned to profitability in 2010. Higher capacity usage resulted in a better cost position for producers while continuous price increases for fatty alcohols, fatty acids and glycerin, as well as their derivatives allowed margin improvements, in some cases to record highs," adds Nottinger.
CHANGING EUROPEAN LANDSCAPE
With a raft of acquisitions and consolidation across the European oleochemical sector, 2010 was a good year for the region because of increasing demand coming from Eastern Europe, as well as decreased supply competition.
UK-based producer Croda permanently shut down its Bromborough plant, in the UK, in December 2009. The plant had capacity to produce 55,000 tonnes/year of fatty acid, 17,000 tonnes/year of refined glycerin and 24,000 tonnes/year of esters. The closure came when European demand was strongly picking up, notes Timothy Rush, vice president and general manager of US-based Oleon Americas, a subsidiary of Belgium-based oleochemical producer Oleon.
"Tallow was also much cheaper than palm stearine so imports from Asia were also ultimately reduced. On top of these factors, demand in Asia picked up, which reduced imports to Europe. This led to a stressed supply-demand situation," says Rush.
Last year, Croda also sold its 150,000 tonne/year fatty acids and glycerin production facility in Emmerich, Germany, to Malaysian palm plantation owner and oleochemical producer Kuala Lumpur Kepong (KLK).
With former power players Croda and Germany-based Cognis divesting most of their oleochemical assets, Oleon now claims to be the largest oleochemical company in Europe, with a total capacity of 500,000 tonnes/year of fatty acids, esters and dimers production. Cognis itself was acquired by German chemical company BASF last year. Cognis sold most of its global base oleochemicals business in 2008, which is now known as Emery Oleochemicals, with headquarters in Malaysia.
"We do not expect any major further consolidation in Europe as there are only about 25 other small family-owned companies left next to Oleon, KLK, Emery and Croda. We don't expect them to sell, as they are now benefiting from the strong recovery after surviving the big global economic crisis," notes Oleon's Rush. He adds that Oleon benefited most from the recovery last year, being positioned as a stable big local player in Europe.
Oleon is looking to expand globally and is investigating further investments in Asia. The company is currently producing esters at its expanding 18,000 tonne/year Malaysian plant, which will nearly double in capacity by fourth quarter (Q4) of 2011.
ASIAN EXPANSION SPREE CONTINUES
For many Asian oleochemical players, especially those vertically integrated with palm plantation owners, expansion through acquisitions or capacity increases is a major goal for 2011.
Aside from KLK's acquisition of Croda's Emmerich plant, Singapore-based Wilmar International acquired Malaysian oleochemical player Natural Oleochemicals (NatOleo) last year. The acquisition positions Wilmar as a dominant Asian oleochemical producer, with a market share of 35% in Asian fatty acids production capacity, according to a report from Malaysian investment firm CIMB Group. NatOleo has total fatty acids and glycerin capacity of 393,000 tonnes/year.
"Low interest rates and low profitability in 2009 made 2010 an attractive year for acquisitions and consolidations," says Nottinger. "For 2011, I would expect less activity as higher multiples on higher profits will probably make deals less attractive. Nevertheless, I would expect further downstream acquisitions by oleochemical feedstock companies and the entry of traditionally non-oleochemical companies into the fields of oleochemical derivatives."
"Capacity utilization from top ASEAN producers [was] above 95%"
Kongkrapan Intarajang CEO, Emery Oleochemicals
Burns agrees, noting palm plantation companies as major drivers for continued consolidation in 2011. "The more progressive companies are looking not only to increase scale of operations in plantations but are also looking to capture more of the downstream value in oleochemicals and derivatives," he says.
Emery Oleochemicals not only intends to invest in downstream operations but also plans to expand its fatty acids capacity to provide value chain integration either by building its own plant or through acquisition within the next five years. Emery currently has around 1m tonnes/year of total oleochemical capacity. The company is also building a 15,000-25,000 tonne/year plant that will produce specialty oleochemicals in Telok Panglima Garang, Malaysia.
"Major players are growing with vertical integration, where Asia will continue to be the major growth area for oleochemicals - both basics and downstream. For Emery Oleochemicals, 2011 will be another exciting year. We see many opportunities," says CEO Kongkrapan Intarajang.
He notes that Emery Oleochemicals' business recovered to prerecession levels in 2010, predominantly driven by brisk downstream demand for higher-value products.
"Our higher-value products supply the personal care, automotive and construction industries, which were doing exceptionally well. Capacity utilization from top ASEAN [Association of Southeast Asian Nations] producers [was] above 95%, whereas the European and US oleochemical industries operated around [the] mid-70% [range]," adds Intarajang.
The challenges the company faced last year were volatility of feedstock costs, mixed market sentiment projections, and the comeback of the biodiesel industry. "The oleochemical industry will likely see similar challenges, and our ability to stay very close to our customers and business partners will allow Emery to ride through these uncertainties," says Intarajang.
BUMPY RIDE FOR THE US
US industry players and observers agree that the market will be bumpy in 2011 as producers cope with feedstock price volatility and uncertainty in glycerin, mostly because of the reinstated $1/gal biodiesel tax credit extension signed by President Barack Obama in December.
The expiration of the federal tax credit in December 2009 drove several biodiesel plant closures in the US, which significantly reduced supply of biodiesel coproduct glycerin. Bio-crude glycerin from the biodiesel process typically contains methanol, while glycerin from oleochemical production, often referred to as splitter crude, is of a higher purity with no methanol residues.
Ready glycerin supply last year was soaked up by improving demand amid a recovering US economy, driving tight crude and refined glycerin supply/demand fundamentals in Q4. If US biodiesel production rises with the reinstated tax credit, another oversupplied glycerin situation could emerge, prompting similar price volatility as that seen in 2008-2010.
"The decline of biodiesel created major concerns for us as we buy and sell byproducts from that industry and we had to shift emphasis more toward oleochemicals," says one US oleochemical trader. "The biggest challenge the industry faces for 2011 is raw-material cost and availability. If biodiesel returns, even more pressure will be placed on a limited and seasonal supply of fats and oils, further pressuring price and creating supply and price unpredictability."
Major US oleochemical player Vantage Oleochemicals agrees that the rising prices for fats and oils, and competition with the global biodiesel industry for raw materials, will be the major challenge in 2011.
"As a consequence of government mandates and subsidies around the globe, our industry and our customers will have to pay more for their basic raw materials. Unless the full cost is passed on to end-consumers, the value chain and subsequent profitability will get squeezed," says Don Ciancio, Vantage Oleochemicals vice president.
He describes the US oleochemical market in 2010 as better than expected in terms of demand, although high glycerin prices continue to be a negative factor, along with the rapid increase in triglyceride prices in Q4 2010.
"Certainly 2010 was a better year with demand probably up by 10-20% from 2009 for most companies, depending on the market mix. This moved utilization rates to a better level from the very low levels in 2009. Most market segments rebounded in 2010, with the exception of the housing market, which has greatly affected demand for plastic materials and in particular stearic acid," says Ciancio.
Recovery in the housing sector is not expected for another few years. "When recovery does occur, we expect a rise in demand for oleochemicals. In the meantime, we are working on several projects that could increase demand for fatty acids," Ciancio adds. The company also expects new applications for glycerin to begin to take root in Q2.
2011 MARKET OUTLOOK
Many expect the fats and oils price increases seen in late 2010 to continue through the first half of this year. Prices of many oleochemicals are said to have risen substantially above the commodity peaks seen in June/July 2008.
Burns estimates lauryl alcohol prices increased between 125% and 150% to $3,100-3,500/tonne (€2,400-2,700/tonne) during the course of 2010 - up by more than 60% from the June/July 2008 peak. "Back in the summer of 2008, all chemicals and commodities peaked, including crude oil. This time around, oleochemicals are out there setting a record pace of their own," notes Burns. "Buyers and sellers are in stand-off mode, but so far, no one is daring to predict when the bubble will burst or even when prices will revert to the mean."
With lauryl alcohol a key surfactant feedstock, large sulfonates and ethoxylates have followed suit, pushing their own price increases throughout 2010.
"Driving oleochemical prices to high levels will undoubtedly cause customers to look for efficiencies in formulations that could impact demand, which is in fact apparently already taking place," says Ellard. "This effect could also impact consumer trends, opening up opportunities in lower price formulations, especially in the developing markets, and perhaps even with surfactants such as methyl ester sulfonates."
Burns expects demand growth in developed economies at 2-3% and higher growth in the BRIC countries (Brazil, Russia, India, China). Nottinger attributes rising consumer demand for fabric, home and personal care products in Asia and Latin America as major drivers supporting growth in oleochemical demand.
US-based surfactant and oleochemical producer Evonik Goldschmidt notes that continued consumer interest in green and sustainable products is a positive trend for the industry. Many oleochemical products sold in the past 25 years already fit the bill in general, says David Del Guercio, senior vice president and general manager for household care at Evonik Goldschmidt. "The problem is there have not been any industry-sponsored education programs to point this out. One of the challenges now is to educate consumers to enable them to make informed choices when purchasing products that fit their own definition of what is green or sustainable," Del Guercio says.
He points out opportunities for innovation and customization as consumer product companies intensively search for ways to improve their products' environmental profiles and performance without having to raise selling prices.
"Going forward, it will become more difficult to improve margins with the current products we and our competitors offer. A key route to upgrade margins is with new product and new technology introductions, which is a process that needs to be thought out with consistent and persistent execution," Del Guercio adds.
Additional reporting by Judith Taylor in Houston and Serena Seng in Singapore
By: Doris de Guzman
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