Turbulent times for oleochemicals

Oleos gone wild

06 January 2009 00:00  [Source: ICB]

2008 has been a turbulent year for oleochemicals. What's in store for 2009?

THE GLOBAL oleochemical industry continues its choppy ride in a time of unbalanced market fundamentals compounded by industry restructuring. While Asian oleochemical mergers and acquisitions marked 2007, it was the US and Europe's turn in 2008.

In January 2008, US specialty chemical company Chemtura divested its oleochemical assets to New Jersey, US-based specialty chemical firm PMC Group North America. The business produces fatty acids, esters, glycerin, amides, stearates and triglycerides at its Memphis, Tennessee, US plant.

And last May, UK specialty chemical company Croda sold its US oleochemical business, acquired from the Uniqema buyout in 2006, to private equity firm HIG Capital. The Uniqema business, based in Chicago, Illinois, US, is one of the biggest suppliers of fatty acids and glycerin in North America.

Meanwhile, German specialty chemical company Cognis is one step closer to leaving the oleochemical industry. In mid-July, the company sold its 50% stake in Cognis Oleochemicals to PTT Chemical International of Singapore, a subsidiary of Thailand-based PTT Chemical, with which Cognis also has a joint venture in fatty alcohol and ethoxylate production in Thailand. PTT Chemical is also the third-largest olefins producer in Asia.

Palm oil producer Sime Darby of Malaysia retains 50% of Cognis Oleochemicals, which produces fatty acid, glycerin, ozone acid, plastic additives and ester-based oilfield chemicals worldwide.

"The formation of the Sime Darby/PTT joint venture is unique to the industry," says Klaus Nottinger, consultant for Germany-based OleoConsult and former sales director for Cognis Oleochemicals. Nottinger noted that the new joint venture will create the industry's first integrated natural and petrochemical feedstock company.

"This might set a new trend in the industry, providing the customer choices on both feedstock types. I think we will see more consolidation in the near future as strategic buyers might find interesting buying opportunities, and the agro-industrial sector, which owns the feedstock, might enlarge their participation in the industry," says Nottinger.

He adds that the recent HIG acquisition might also confirm a trend toward forward integration of oleochemical producers.

WHO'S WHO IN EU

Industry speculation is that Cognis and Croda will soon completely remove themselves from the oleochemical supply scene.

Oleochemical consultant and former managing director of Malaysia-based FPG Oleochemicals, Alan Brunskill, noted in Oils and Fats International magazine that Cognis will soon sell its fatty alcohol joint venture to its partner PTT, to allow the company to further focus on its strategic businesses.

"It is difficult to see PTT wanting ownership of fatty acids without alcohols being part of the plan," he said. Brunskill also speculated that Croda might sell its remaining oleochemical facilities in Europe after divesting the company's Malaysian and US plants that it acquired from Uniqema.

"Like Cognis, Croda has no appetite for fatty acid production facilities. It leaves us to wonder when we will hear anything about the European facilities and who, if anyone, would want to buy them," Brunskill said.

Belgium-based Oleon was the last major European oleochemical company standing. However, in November, its private equity owners sold the company to biodiesel firm Diester Industrie, a subsidiary of Sofiproteol, the financial arm of the French vegetable oils and proteins producer. The deal is expected to be completed in early 2009.

Oleon said the transaction will allow the company to join a group that is present in the oilseed and processing sector as well as strongly engaged in the development of oleochemistry. Sofiproteol also owns Novance, a France-based specialty oleochemical producer.

ECONOMIC SQUEEZE

While some say that further M&A and ownership changes may stall for a while, others note that the market situation now might necessitate operators to seek alliances or the outright sale of assets.

"What we might see is the emergence of global cooperation and ventures involving product swaps as producers seek to optimize their global product balances and product mix," says Neil Burns, general manager of New Jersey-based Oxiteno USA. Oxiteno is a petrochemical and fatty alcohols producer based in Brazil.

According to Burns, there might also be some shuttering or mothballing of older and higher-cost plants as demand now is substantially ahead of global capacity. He adds: "Demand has unquestionably softened in the past few months. This is due to a combination of the economic slowdown, a reluctance of many buyers to buy into a market where prices are falling, and a need to reduce inventory and maximize cash."

Some Asian plants are reportedly already running under capacity, especially in the area of glycerin, fatty acids and biodiesel, says Norman Ellard, director of Singapore-based consulting and trading company Rohen, as well as former director of Procter & Gamble (P&G) Chemicals Asia.

Ellard notes that if the current low-level demand continues, on-purpose curtailment of production will likely to continue as well.

"2008 has been a year of extremes," he says. "Earlier this year, the industry faced record high feedstock prices and the challenge was to adjust selling prices to keep and continue to make a margin. By September, feedstocks collapsed to very low levels, leaving many suppliers and customers with inventories and commitments out of sync with the feedstock prices."

The market, he adds, is now catching up to the new reality of demand, cost and cash. "Cash is now the primary concern, and taking inventories to levels that make sense in the current environment is the priority."

YOUR CREDIT IS GOOD, BUT...

In the US, demand held up well through October, but started eroding in November and December, says Uniqema Americas vice president Don Ciancio.

"There will be a much larger inventory draw-down than normal for 2008 as commodity pricing has collapsed since October," he says. "On top of that is the demand loss for a weaker economy. The amount of demand erosion from market segments such as construction and automotive will be significant, but hard to quantify at this point."

Like other oleochemical businesses, Ciancio says Uniqema's business has had to deal with a run-up in raw material pricing and energy inputs driven partly by bad global policy and overspeculation.

"Now the industry has to deal with a global oversupply of glycerin as a result of biodiesel production," he notes. "Business is hard and businesses need to be well managed to succeed. Controlling costs is a must."

Oxiteno's Burns notes that the company is watching very carefully the credit quality of its customers.

"We are upgrading the quality of our customer base where we can, and in some cases working on a cash-in-advance basis," he says. "Cash is king in this environment for many companies - not just banks."

OleoConsult's Nottinger observes that some customers worldwide are now going into default contracts while banks are putting new letters of credit on hold.

INCAPACITATED CAPACITY

The global capacity surge was the talk of the oleochemical town the past two to three years, but industry observers wonder if some of the previously announced new or expanded fatty alcohols, fatty acid or glycerin refinery plans are still on the line.

Oleochemical consultant Norman Ellard of Rohen notes that at least one large Asian project has been delayed, but did not disclose further information.

"Some of the capacity expansion delays have been more due to other issues like over-optimistic start-up schedules," Ellard adds.

Neil Burns of Oxiteno confirms that there has been curtailment and deferral of new facility start-ups, while Klaus Nottinger of OleoConsult notes that there are still some expansions ongoing in mature markets such as Oleon's new fatty acid plant in Ertvelde, Belgium, and Twin Rivers Technologies' glycerin refining plant in Quincy, Massachusetts, US. Twin Rivers itself was acquired last year by Malaysian palm oil group Felda Holdings.

Oleon is also building a fatty ester plant in Malaysia, which is expected to start this month. Last May, South Africa-based Sasol finally started up its Chinese fatty alcohol joint venture plant with Singapore-based Wilmar Holdings.

One capacity investment announced in 2008 was Integrated Biodiesel Industries' new glycerin processing plant in Brazil, which will have capacity of 20,000 short tons (18,144 tonnes)/year.

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