Paradise postponed

08 October 2001 00:00  [Source: ACN]

Oleochemical markets are facing volatile raw material prices. And the bleak global economic outlook has affected demand in some sectors, writes Malini Hariharan

The fortunes of oleochemical producers are once again changing. After reaping the benefits of depressed palm oil prices, producers are now confronting extreme price volatility. Added to this is the economic uncertainty following the events of 11 September. Many of the major producers had already experienced a dip in sales volumes and profitability in H1 2001. And now, they are cautiously praying for the best but preparing for the worst.

Central to the fortunes of the Asian industry is palm oil and coconut oil - their production and prices.

Palm oil and coconul oil prices touched historical lows last year and appeared set to continue at these levels. Then unexpectedly, prices rebounded in early Q3.

For instance, average refined, bleached or deodorised (RBD) palm oil export prices from Malaysia, the largest producer in the world, touched a low of US$193/tonne fob Malaysia in February. This was a 44% fall from the peak in April 2000. But by August this year, they had climbed back to US$333/tonne fob Malaysia only to fall to US$240-250/tonne as this feature went to press.

There were many factors responsible for the swing in prices. When prices touched a historical low last year, plantation owners in Malaysia and Indonesia cut back on maintenance activities. These activities include the use of herbicides and fertilisers. As a result, productivity and production plunged and the surplus in markets eased.

Developments in the soybean markets and an increase in palm oil imports by major consuming countries, India and China, also contributed to the surge in palm oil prices in early Q3. Soybean prices rose after concerns arose that bad weather in the US could affect production. Last year, a bumper crop of soybean was one of the factors responsible for pushing down palm oil prices to a low of US$209.5/tonne in December.

Passing on the cost increases experienced in early Q3 has not been easy.

'It has been difficult for us to increase the prices of our products. We have been forced to absorb some of the cost increase,' complains an Indonesian fatty acids producer.

'Our customers are delaying purchases or cancelling shipments. On the other hand, we cannot cancel our palm oil contracts. We are being forced to buy whatever we have promised. As a result, we are now holding stocks of finished products,' the producer adds.

'Almost every customer knows that raw material prices have fallen in September and they are pushing for lower product prices, says Koji Aoki, general manager, speciality chemicals section of Marubeni.

As a result, prices of lauric acid have dipped to below US$400/tonne fob SEA from around US$450/tonne fob SEA at end-August. Buying ideas are even lower at US$350/tonne fob SEA.

One product that is holding steady is glycerine which is now trading at US$880-900/tonne fob Asia, up from US$750/tonne fob Asia earlier this year. Producers have sold all of their product until the end of the year which is keeping prices firm, explains a trader.

But it is a buyers market for all other oleochemicals.

'We are trying to make ends meet as we made the mistake of purchasing palm oil when prices were on the higher side,' says a second Indonesian producer.

Japan: Production and sales of oleochemicals ('000 tonne)

Production Sales
1999 2000 H1 2001 1999 2000 H1 2001
Splitted fatty acid 220 218 99 38 36 18
Distilled fatty acid 104 106 48 69 71 31
Oleic acid 25 25 11 19 19 9
Stearic acid 8 9 4 4 4 2
Lauric acid 14 13 6 8 8 4
Other fractionated fatty acid 13 10 5 6 5 2
Refined glycerine 52 55 26 56 60 30
Total 436 436 199 200 203 96
Source: Marubeni

Japan: Imports of oleochemicals (tonne)

1999 2000 H1 2001
Industrial monocarboxylic fatty acids
Stearic acid 23 236 21 045 10 038
Oleic acid 7851 8794 3903
Tofa 1724 1965 894
Others 37 018 34 621 16 803
Total 69 829 66 425 31 638
Saturated & unsaturated monocarboxylic acids
Stearic acid 4498 3418 1819
Apric acid, lauric acid, myrstic acid 26 635 27 752 14 020
Stearic acid, their salts and esters 6427 7124 4072
C10-C18 acid derivatives 292 340 188
Linolic acid, their salts and esters 660 992 487
Total 38 512 39 626 20 586
Grand total 108 341 106 051 52 224
Source : Marubeni

Margins for fatty alcohol and fatty acid producers were good last year but it is an entirely different story this year. Operating rates have also fallen from an average 85-90% in early 2001 to 65-85% in August.

A major Southeast Asian producer says it has for the first time been unable to meet its sales budget. The producer usually delivers single-digit growth over its budget. But this year, sales have been 2-3% below budget.

Besides the fluctuations in palm oil prices, the economic slump in Asia and elsewhere in the world has added to producer woes. For instance, sales in the plastics additives sector have been badly hit. Hiroshi Yamaguchi, director and general manager of Kao (Southeast Asia), says Kao's sales to ABS processors have dived due to the weakness in the global electronics and computer industries.

Sales to PVC processors have also fallen. Kao produces a heat-resistant plasticiser used for the production of PVC electric, computer and illumination cables. Sales to the computer cables sector have been poor.

And Yamaguchi forecasts that sales to the illumination cables sector will also be affected. These cables are used to decorate Christmas trees. He believes the 11 September terrorist attacks on the US will adversely affect the Christmas spirit this year.

One sector that appears to be 'recession resistant' is that of personal care. Soaps and shampoos are essential items on any consumer's shopping list. Even when the going gets tough, consumers hesitate to cut back spending on these items. 'There is a 'feel good' factor about these products,' explains Chris Nottingham, managing director of Croda Singapore. 'The products are not vastly expensive. Therefore, consumers will continue to use these products.'

Yamaguchi says studies by Kao have revealed that the high-income group does not easily change its attitude vis-à-vis products such as soaps, shampoos or detergents. Habits of the middle and low-income groups are also fairly stable, although usage may fall in times of extreme economic hardship.

The personal care segment is probably the only bright spot in the oleochemicals market.

The terrorist attacks have raised the likelihood of a global recession which could impact demand in all other sectors.

But more immediately, industry players need to assess how palm oil markets will move as Pakistan, the third largest importer after China and India, is likely to play a crucial role in any military action that the US initiates.

Pakistan imports around 1m tonne/year and the question is will Pakistan be forced to curtail purchases in the coming months?

Industry players are divided in their views. One section believes a war in the region can only have one result - curtail demand. But others believe the decision by the US to lift economic sanctions against Pakistan and the likelihood of financial support from the West could in fact boost Pakistani demand. And if this happens, palm oil prices are likely to rise - bad news, as end-markets are unlikely to be in a position to absorb cost increases.

'It is difficult to project palm oil prices for H2. Demand is very strong from Europe and the Middle East. On the supply side, plantation productivity in Malaysia has fallen. A lot will depend on Pakistan,' says Aoki.

MC Menon, vice-president of marketing at Pan Century Oleochemicals notes: 'The immediate outlook is bearish. Business is unlikely to improve until H2 2002.' He, however, believes palm oil prices, which constitute about 80% of raw material costs, are unlikely to see sharp increases in the near future.

Yamaguchi adds: 'In 2002, we expect to maintain business in Southeast Asia or at best grow by 1-2%.'

Some market players are also worried about new capacity that is being added in Southeast Asia at a time when demand is likely to be weak.

'Capacities are growing because producers want [better] economies of scale. This in itself is not bad. But the larger they become, the greater is the pressure to sell the extra volumes,' believes the second producer. He anticipates a 20-25% growth in Asian fatty acid capacity in 2002.

Companies that have already announced plans to add oleochemicals volumes include Kao's Malaysia subsidiary, Fatty Chemical, Acid Chem International. Natural Oleo is also reportedly adding fatty acid capacity which will increase from 100 000 tonne/year to 245 000 tonne/year in H1 2002. Many others are considering new plants although current market conditions may well delay the timing of their investments.

In Indonesia, state-owned palm oil producer Perkebunan Nusantara is planning to construct an oleochemicals facility in northern Sumatra. A startup date has yet to be finalised. Bahana Oleo Selaras has plans for a 45 750 tonne/year fatty acid plant.

In fatty alcohols, Shell and Sasol have planned huge increases in synthetic alcohol capacity in the US and South Africa respectively. 'Global demand and supply for fatty alcohol was tight during 1998-2000. The market was fairly well balanced in 2001. But we expect oversupply during 2002-05,' predicts Yamaguchi.

But Aoki is optimistic that the increased fatty acid capacity in 2002 will not have a major impact on the market. He points out that many of the capacity increases are linked with downstream expansions. He cites the example of Natural Oleo which is building a new 50 000 tonne/year soap chip facility along with an increase in fatty acid production.

Producers lost heavily in 1996-97, when Malaysia and Indonesia added a total 400 000 tonne/year of capacity. Operating rates at that time plunged to 50-60%.

'Producers have probably learnt a lesson. They have no desire to expand just to become bigger. Now, along with expansions in fatty acids, they are adding downstream production facilities,' says Aoki.

Most of the new oleochemical projects are in Malaysia and Indonesia, the two countries that enjoy a natural advantage of abundant raw material.

Demand, however, is growing fast in China and India. The growth in the disposable incomes of the people in the countries is expected to stimulate consumption of products which are based on oleochemicals.

But the absence of a distinct feedstock advantage is expected to keep both countries import-dependent.

Another major market in Asia is Japan. But the country's economic woes have arrested consumption growth. For instance, production of fatty acids and glycerine have remained stable at approximately 436 000 tonne for each of the last two years. Fatty acid imports have declined from around 108 000 tonne in 1999 to 105 000 tonne in 2000.

The current South Korean market for fatty acids and oleic acid is estimated at a total of 70 000 tonne. Glycerine demand is approximately 18 000 tonne, says BD Kang of Hwadong. The country has four producers who have no plans to expand business.

Indonesian demand for fatty acids and glycerine is estimated to be 30 000 tonne in 2000 against a capacity of 350 000 tonne/year. Domestic demand is expected to grow by 5-10% this year.

Coming back to the present, the current turmoil in markets cannot mask the bright future for the industry. Growing emphasis on the use of renewable resources and the trend to use end-products that are based on natural oleochemicals, especially in Europe and the US, means the industry has sufficient room to expand.

Major Asian oleochemical producers ('000 tonne/year)

Acid Chem 220 75 - -
Akzo Nobel Oleochemicals 140 - - -
Cognis 100 - - -
Cognis Rika - - - 30
Fatty Chemical - - - 110
FPG Oleochemical - - 200 60
IFFCO Malaysia - 45 - -
Kao - 30 - -
Natural Oleo 145 - - -
Pacific Soap - 20 - -
Palm Oleo 125 50 - -
Pancentury Edible - 60 - -
Pancentury Oleo 100 - - -
Southern Acid 75 - - -
Southern Edible - 20 - -
Uniqema - 90 - -
Total 905 390 200 200
Aribhawana Utama - - - 33
Ecogreen Oleochemicals - - - 90
Cisadane Raya Chemical 90 20 - -
Flora Sawita 52 - - -
Sinar Oleo Chemical 80 - - -
Sumi Asih 100 - - -
Total 322 20 - 123
Imperial Industrial Chemicals 10 - - -
Total 10 - - -
Cocochem 75 - - 36
Pilipinas Kao - - - 30
Prime Chem* 50 - - 30
Senbel - - - 8
Total 125 - - 104
Chiba Fatty Acid 36 - - -
Kao 84 20 - 17
Lion - 20 70 -
Miyoshi 24 - - -
New Japan Chemical - - - 12
NOF 75 2 - -
Total 219 42 70 29
South Korea
Dong San 8 5 - -
LG Chem 36 - - -
Pyung Hwa 12 - - -
Sanko 6 - - -
Total 62 5 - -
GGIC 40 - - 18
Uniqema 90 50 - -
China 120 - 20 20
Asia total 1893 507 290 494
* closed
Source: Marubeni

Monthly export prices of RBD* palm oil (US$/tonne fob Malaysia)

2000 2001
January 317.5 199.5
February 304 193
March 319 223
April 343.5 223
May 306.5 207
June 290.5 223.5
July 279.5 287
August 275 333
September 260 279
October 218 -
November 226 -
December 209.5 -
*refined bleached deodorised
Source: Malaysian Palm Oil Board

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