18 January 1999 00:00 [Source: ICB Americas]By Peter Landau
The price of crude sulfate turpentine (CST) has fallen for the third consecutive quarter. As of January 1, CST has dropped to $1.25 per gallon, a 25 cent decrease that follows declines of 10 and 15 cents during the past two quarters. Analysts expect CST prices to continue falling throughout the year, though most industry insiders agree that the rate of decline should level off during the next quarter.
CST's initial price decrease, posted in the third quarter of 1998, reduced it from a cyclical high of $1.75 per gallon to $1.65. Producers considered the move necessary to avoid repeating the steep and speedy crash of the last CST cycle. Analysts say that this quarter's large drop is a result of earlier decreases not being strong enough to match the declining demand in end use industries.
"We were trying to keep a lid on the rate of production," a fractionator says. He considers the 25 cent drop a correction for the more conservative decreases of the past two quarters and expects smaller decreases in upcoming quarters as CST prices follow their historical curve downward.
"That's a healthier situation for the industry," he notes. "Nobody wants large jumps up or down. We're happier with a slower rate of change on all sides."
Producers and buyers of CST blame mounting inventories and a softening demand for aroma chemicals, pine oil and resins--the three markets for CST--as the main reasons for the price decline.
In November, the ending inventory for CST was 3.8 million gallons, according to the Pulp Chemicals Association Inc. The industry produced 2.3 million gallons, and 1.8 million gallons were used for fractionation. The October inventory was 3.5 million gallons. Though December figures are not yet available, analysts expect inventories to continue rising. Inventory surpassed 4 million gallons last June.
Suppliers say inventories of CST are not abnormally high, but they expect inventories to continue growing. Fractionators blame a decline in aroma chemical volumes rather than an increase in the output of pulp mills. "The paper industry has ground to a halt," says one major fractionator. "Mills are down, but the uses of turpentine are down even more than the pulp mills are."
CST recovery is likely to ease. "We are already seeing a decrease in the production of CST," notes a fractionator. However, other variables are influencing the market besides the traditional factor of paper mill production. "It's hard to say if there's going to be enough of a reduction to balance out the whole thing and solidify prices," he says.
China is playing a larger role in CST pricing. Gum turpentine can be used as a substitute for CST and is being priced competitively. Import statistics show that large quantities of gum turpentine have come into the US during the last few years.
Gum turpentine has a unique value to fractionators because it has no sulfur, which must otherwise be distilled out.
"That's a minor cost in the whole process," a major fractionator says. "We're almost indifferent to the two materials."
But others disagree. "Fractionators make products that are extremely sensitive to sulfur contamination," another fractionator notes. "They don't even want a single part per million in some of those products."
The influence of China and its competitive gum turpentine cannot be dismissed. "Gum turpentine gives the fractionators a club to negotiate a better price from the CST sellers," notes an industry insider. "I see China as a permanent competitor." A supplier adds that "certain segments of the industry will use gum when it is cost effective."
Early signals indicate that China will not repeat the record harvest for gum turpentine that it reaped last year. "I would not dismiss Chinese material," a supplier notes, "but it is nowhere near the factor that it was in late 1997 through 1998."
"Demand is weak in almost all segments of the turpentine business," a major CST supplier says. "I think there has been some production downtime on the part of some fractionators as a reflection of that weak demand."
Global demand for aroma chemicals is down significantly. Markets in Asia, Russia and South America are in recession, and demand in the US and Europe, the two largest consumers of aroma chemicals, is also off. Businesses are using up their inventories and not buying new product.
The market for aroma chemicals was strong until mid-1998, but many major producers have added capacity. "There is less demand and more capacity, and prices are under a lot of pressure," a fractionator explains. "Not only is demand down, but prices are down for the products you can sell. There is going to be further price pressure during all of 1999."
TECHNOLOGY FLAVORS & Fragrances Inc. has elected to its board of directors Sean Deson, senior vice-president of the investment banking division of Donaldson, Lufkin & Jenrette Securities; Bruce S. Foerster, president of South Beach Capital Markets Advisory Corporation; Werner F. Hiller, industry consultant to Con Agra Inc.; and Irwin D. Simon, president and CEO of The Hain Food Group Inc.
TFF has also formed a new advisory committee comprised of Andrew M. Brown, president and chief investment officer of CounterPoint Capital Management; Daniel P. DeClark, owner and developer of Beverage Flavors Inc.; and Bruce G. Seitz, a sales, marketing and business development consultant.
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