Slowing Economy Puts CTO in Flux With Reduced Demand, Lower Supply

14 May 2001 00:00  [Source: ICB Americas]

By Doris de Guzman

The supply/demand balance for crude tall oil (CTO) and its derivatives is coming into balance as tighter supplies are being met with reduced demand. Supplies of CTO and CTO-derived products are contracting as the pulp and paper industry reduces operating rates due to the US economic slowdown. The economic downturn is also lowering demand for CTO and CTO-derived products in major segments in adhesives and construction, which is resulting in a more balanced market.

"CTO supply has tightened up a bit due to lower mill operating rates. That has resulted in lower CTO and black liquor soap production," says an official from Arizona Chemical. "But the market has been balanced to a significant extent by reduced demand for CTO and CTO-derived products."

Other producers also point to the pulp and paper downturn and resulting reduction in CTO supply. "A major impact that we are seeing in the CTO industry comes from the paper side," says Juan Magrans, worldwide business director for the resins and co-products strategic business unit at Hercules Inc. "Paper mills are lowering their operating rates, and we are seeing a 5 to 10 percent reduction in CTO supply," he adds.

CTO is produced as a by-product of pulp production, and lower operating rates means reduced supply of CTO and related derivatives. CTO originates as black liquor soap, which is separated from recovered black liquor in the kraft pulping process. The soap is then acidulated to yield CTO. After that, the tall oil is fractionated to produce fatty acids, rosin distilled tall oil (DTO) and pitch. "With lowered CTO supplies, automatically, that means decreased production of tall oil rosins, fatty acid and other CTO derivatives," explains Mr. Magrans.

CTO production has declined steadily since early 1998 mainly due to a curtailment in pulp and paper production. Total US CTO production was 123,000 tons for the first three months of this year, a 15 percent decrease from the 146,000 tons produced from January to March 2000, according to the Bureau of the Census.

Over the last three years, a significant amount of fractionating capacity has also been taken out of the market. Total US fractionating capacity in 2000 was 975,000 tons, and this year capacity is down 8.8 percent to 889,000 tons. Consolidation and restructuring are the main reasons for the reduction in capacity.

"There is still some excess fractionating capacity in the industry," explains the Arizona Chemical official. "We are consolidating our capacities to the point that the remaining towers that we have are very solid, efficient, appropriately sized units which we intend to run long term."

Arizona shut down its Oakdale, La., fractionating plant at the beginning of this year. The Oakdale plant had a capacity of 60,000 tons per year. In 1999, Arizona closed its Springhill, La., plant, which had a capacity of 50,000 tons per year. Outside the US, Arizona also recently shut down its 80,000-ton-per-year Chester-le-Street, UK fractionating plant.

Restructuring is still ongoing as two major CTO players--Arizona Chemical and Georgia-Pacific Resins--are being divested by their parent companies, International Paper and Georgia-Pacific, respectively. The sales of Arizona Chemical and Georgia-Pacific's chemical division are still under negotiations, while Hercules has recently concluded a $244 million sale of its hydrocarbon resins and a select portion of rosins resins businesses to Eastman Chemical.

Eastman now owns two of Hercules' fractionation units in Franklin, Va., and Savannah, Ga., although they are still operated by Hercules under contract. Hercules retained its Burlington, Canada, fractionating plant, which continues to operate for captive consumption.

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