CTO Consolidation Continues as Market Stays Flat

21 January 2002 00:00  [Source: ICB Americas]

Consolidation and a flat demand, two major themes seen in the crude tall oil (CTO) market last year, are expected to be in play again in 2002. Because of the economic downturn, raw tall oil supply, both in the US and globally, continues to contract because of lower mill operating rates and further consolidation in the pulp and paper industry. Meanwhile, demand for tall oil and its derivatives across the major market segments continues to drop at the same rate as the declining supply, resulting in a balanced market and stable pricing for CTO and CTO-derived products.

On the supply side, several producers closed down some of their fractionating capacity, as many in the industry still see the CTO-derivatives market as being oversupplied. The latest move occurred last month when Eastman Chemical Company announced plans to close its fractionation and rosin ester operations in Savannah, Ga. Eastman plans to close its 70,000-ton-per-year CTO fractionation capacity in Savannah and at the same time expand its Franklin, Va., capacity from 70,000 to 100,000 tons per year. The consolidation is expected to be complete by 2003. Both facilities were acquired from Hercules Inc. last year. Hercules retained its CTO fractionation facility in Burlington, Ontario, Canada, for captive consumption. The Burlington facility has around 17,000 tons per year of CTO fractionating capacity.

Last year, Arizona Chemical Com-pany shut down two of its CTO fractionating plants with a total capacity of 140,000 tons per year. One was in Oakdale, La., with a capacity of 60,000 tons per year, and the other was the company's 80,000-ton-per-year Chester-le-Street fractionating plant in the UK.

Meanwhile, industry restructuring is still ongoing as Arizona Chemical and Georgia-Pacific Resins Inc. (GPRI), are being divested by their parent companies, International Paper Company and Georgia-Pacific Corp., respectively, for sale or merger.

Westvaco Corp., the second largest CTO fractionator in the US after Arizona Chemical, had announced last year its merger with Mead Corp., a major forest products company in the US. Westvaco's specialty chemicals division fractionates a total of 200,000 tons per year of CTO. Still, according to Westvaco, its specialty chemicals business is not a candidate for divestiture as the company plans to continue overseeing its business growth.

According to some industry observers, the merger is not going to have a significant effect within the industry although it could indirectly affect Westvaco's fractionation business once the merger is completed. "With the merger, Westvaco's fractionation business will obviously have more pulp mills within their parent company than they used to. However, those pulp mills that produce CTO will probably come with supply commitments, so it's not going to have a significant effect in their business by this year. Over the long run, most of the supplies will probably go to them," says one observer.

The European CTO industry, on the other hand, is preparing for an influx of CTO and CTO derivatives supply from a new player, Forchem Oy, previously named Rauma Forest Chemical. Forchem is currently constructing a new fractionation plant at Rauma, Finland, and will start production by the end of the year.

"Our project is proceeding well and is on time [and] on budget," says Martti Fredrikson, Forchem's CEO and president. "The economic cycle seems to favor this industrial investment, and the project has already caught the attention of the global tall oil community and customers who mostly welcome a new player in the industry in Europe," adds Mr. Fredrikson. Prior to the founding of Forchem, Mr. Fredrikson was formerly a marketing manager in Arizona Chemical's oleochemicals business in Europe.

The overall capacity of the Rauma plant can fractionate 150,000 tons of CTO per year and will have the capability to process about 10 percent of the global CTO production, according to Forchem. However, some industry observers say that the company may build less capacity than what has been announced. "We don't think the capacity is going to be quite that big. They are probably going to build along the lines of 100,000 tons per year of fractionating capacity with a capability to expand to a larger size," says one observer.

Forchem plans to export 90 percent of its production mainly to Europe, concentrating in Sweden, Great Britain, Germany and in the Benelux countries. In Europe, Arizona Chemical is the largest tall oil fractionator with a total of 365,000 tons per year of CTO fractionating capacity located in Moss, Norway; Oulu, Finland; Valke, Finland; and Sandarne, Sweden. Arizona currently accounts for 83 percent of European tall oil fractionation capacity. Forchem, with its new plant, is targeting a gain of 30 to 33 percent market share.

With the new capacity coming on stream in Europe by the end of the year, demand for raw tall oil may increase a little and might even indirectly benefit US CTO suppliers, says one producer. "We are even now exporting CTO to Europe, and we expect US CTO exports to be a lot higher in 2002 compared to last year," says the producer. He adds that CTO inventories in Europe this year are preparing for the excess fractionation capacity coming on stream when Forchem starts. Most of the US CTO exports go to Scandinavian countries and to Japan.

Meanwhile in the US, raw tall oil stocks are expected to build up this year if the economy recovers. "Any economic upturn during the year will probably accelerate the trend in building CTO inventories led by increase pulping by the paper industry," says one fractionator.

Most fractionators expect the US CTO market in 2002 to remain mostly flat and pricing stable for the foreseeable future. "We expect the flat market conditions to continue throughout the year. Although increased demand is expected by the second half of the year, CTO inventories in the US are also building up," says one major fractionator.

"The price range for CTO will remain $100 to $110 per ton at least through the first half of the year unless there's a change in the market scenario," says one industry source. Distilled tall oil in bulk remains at 32 cents to 33 cents per pound while unrefined distilled tall oil are still selling at 25 cents to 27 cents per pound.

Last year, overall US demand for CTO derived products declined between 5 percent and 15 percent, depending on the end market segment, says one industry source. "Most of the decline comes from key market segments such as the paper sizing industry, adhesives and graphic arts market." The declining demand situation was made even worse after the September 11 tragedy, according to another source, as volumes in demand went down and pricing for CTO-derived products across the major market segments became weak.

Market conditions in the European CTO market last year were the same as in the US with CTO supply dropping as a result of lower mill operating rates and demand declining. The utilization rate in most of the fractionating capacities in Western Europe is estimated at between 80 percent and 85 percent although one source says operating rates are very hard to estimate as some plants are running higher than others depending on efficiency and location. In the US, operating rates are estimated at 75 percent to 80 percent.

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