Surfactants Producers Continue to Face Margin Pressure

26 January 2004 00:00  [Source: ICB Americas]

Surfactant producers faced one of their most challenging years in 2003, and producers see little improvement in the year ahead.

"2003 was a difficult year for the North American chemical industry, particularly in the surfactants intermediates and derivatives areas," says Jim O'Neill, market manager, household I&I (institutional and industrial) for Huntsman LLC. "Historically high feedstock costs for benzene, n-paraffin and natural gas, coupled with global overcapacity in LAB, product cross-substitution and mass merchandising severely compressed margins in LAB," he says.

"The 2003 LAB market conditions and business performance are well below expectations," says Mark Quintyn, commercial director with Petresa. "Indeed ample supply and decreased demand, as a result of deformulation, reformulation, and economic recession versus high raw material costs (kerosene, benzene and energy) have badly hit the profitability of the LAB business during 2003," he notes. Some industry estimates put increased costs for LAB at 5 cents per pound, with market pricing declining by a similar amount, putting LAB into periods of negative cash returns.

"LAB is definitely in a long position," says Neil Burns, vice president of marketing with Pilot Chemical. "LAB demand in North America is flat at best. Add to that the margin pressures caused by higher energy and feedstock costs, plus increased purchasing power of large consumer product companies and retailers, and recovery does not seem soon."

The underlying supply-demand fundamentals for LAB explains the product's woes. Global overcapacity for LAB is estimated at roughly 20 percent. Global operating capacity of LAB is estimated at 3 million metric tons versus global demand of 2.37 million metric tons. This overcapacity extends to all the major geographic markets-North America, Europe, Asia and Latin America. Total LAB operating capacity in the Nafta region is estimated at 540 million metric tons with an expected demand of 410 million metric tons in 2003. In Europe, overcapacity is greater, with LAB operating capacity at 570 million metric tons and total consumption at 380 million metric tons. In Asia, LAB demand is estimated at 940 million metric tons and LAB capacity is rated at 1.45 billion metric tons. And in Latin America, LAB operating capacity is estimated at 370 million metric tons, with estimated demand at 260 million metric tons.

Looking ahead to the full year 2004, producers do not see much change. "The continuing LAB oversupply situation will keep pressure on the LAB market conditions also for 2004," says Petresa's Mr. Quintyn. "New upcoming capacity will definitely not contribute to the overall improvement of the market situation," he adds.

Total worldwide LAB demand in 2004 is projected at 2.46 million metric tons, which would translate into average growth of 3.8 percent over 2003. "Demand will grow in Asia at an expected rate of about 5 percent, where in areas such as Europe and North America, we expect the market to remain flat," says Mr. Quintyn.

Others also see 2004 as another difficult year for LAB. "New global LAB capacity in the Far and Middle East is contributing to lower-than-normal capacity utilization," says Huntsman's Mr. O'Neill. "This, coupled with continued high feedstock costs, make LAB unprofitable and ripe for consolidation. Margins are non-existent, and cost push pressures must force LAB prices upward this year." He adds, however, that the LAB market is expected to become more in balance in 2005.

In terms of LAB, producers gained a price increase of roughly $40 per metric ton or 2 cents per pound in 2003 in different geographic areas. In the US and Canada, 2003 price levels were in the range of 42 to 46 cents per pound delivered. In Europe, prices were in the range of  845 to  865 per metric ton delivered. In Asia, which some consider the weakest market, price levels were $710 to $750 per metric ton CRF.

In addition to overcapacity, LAB producers also are facing competition from other surfactant intermediates, such as the alcohol derivatives and methyl ester sulfonate (MES). Substitution pressures continue to increase for LAS (linear alkylbenzene sulfonate), the surfactant made from LAB.

"The first half of 2003 saw lower volumes due to product cross substitution, specifically of LAS-rich detergent formulations with ether sulfate-rich formulations," says Huntsman's Mr. O'Neill. "The second half of 2003 saw improved LAB volumes as linear alcohol supply was more balanced, and increasing prices for ethylene and linear alcohol brought LAB/LAS back into a competitive price position versus the sulfates."

However, overall market fundamentals will continue to pressure LAS. "Consumer product companies continue to drive their costs down by reformulating to the lowest total cost formulation," says Huntsman's Mr. O'Neill. "LAS, the mainstay of detergent surfactants, has been under significant competitive pressure from ether sulfate, due to total cost benefits. Several large consumers have switched from LAS to ether sulfate-rich formulations in the past year."

This switch has helped the alcohol sulfates, whose market, unlike LAS, remains fairly balanced. "The supply-demand balance for alcohol ether sulfates and alcohol sulfates is broadly balanced," says Pilot Chemical's Mr. Burns. "We continue to see good demand for alcohol sulfates and expect this to continue in 2004." Pilot will increase its sulfation capacity by roughly 20 percent in 2004 through a series of investments in its Cincinnati, Ohio, facility. The company will also be expanding its capabilities in low color ether sulfates.

Although alcohol-based surfactants performed better than detergent alkylates, this sector still saw margin pressure as the detergent-range alcohol markets supply situation has changed over the past several years. Early in 2003, Sasol Olefins and Surfactants brought on its 120,000 metric ton-per-year C12 to C15 alcohols plant in Secunda, South Africa. Shell Chemicals idled 100,000 tons of capacity of Neodol detergent-range alcohol plant in Geismar, La., in 2002. Also, in 2002, BP Chemicals permanently closed its 60,000 ton-per-year alcohol plant in Pasadena, Tex.

Other commodity surfactants also continue to face margin pressure. "2003 was tough year with significant margin erosion as ethylene and linear alcohol pricing firmed throughout the year, and ethoxylate pricing declined as major synthetic liner alcohol producers looked to place global capacity in the marketplace via derivatives," explains Huntsman's Mr. O'Neill. Now, 2004 is starting out on a bad note with high feedstock costs for ethylene and both synthetic and natural linear alcohols," he says.

Others also point to margin compression for ethoxylated products. "The industry was devastated by raw materials price increases in 2003," says Keith Wiggins, North American commercial director for functional solutions and surfactants at the Dow Chemical Company. "The industry took a tremendous hit with the cost of hydrocarbons last year, which significantly compressed margins.

One promising sign, however, is that some producers say ethoxylated surfactant prices have moved up an average of 3 cents per pound so far this year. "Demand for surfactant products and key raw materials, including ethylene oxide, is predicted to be strong going in 2004. As market supply and demand tightens, there is more optimism for upside on producer pricing," says Dow's Mr. Wiggins.

Producers Cut Costs

Faced with difficulties in margins, several producers made cuts to their surfactants business last year. This included the idling of Sasol's 100,000 ton-per-year LAB plant in Porto Torres, Italy, in 2003.

Akzo also made cuts. Last June it announced a reduction of 200 positions in its surface chemistry business unit. The move followed its 2002 acquisition of the industrial specialties operations of Crompton Crop. "The restructuring involved elimination of positions in our manufacturing facilities in the US with small reductions in research and support staff, minor reductions in Asia Pacific and a broader reduction in our European operations, including research, manufacturing and operations," explains Francis Sherman, general manager, Akzo's surface chemistry business unit. The reduction of the positions globally has been finalized in the US and Asia Pacific and will be completed in Europe this year.

Like other surfactant producers, Akzo's Mr. Sherman cites margin pressure. "Our total surfactant business was under significant margin pressure in 2003," he says. "Energy and raw material costs have escalated and have not been passed through to the end customers. The detergent, I&I and personal care markets are no exception to the difficult market conditions." Akzo Nobel started up a new nitrogen derivatives plant in Singapore to serve its customers in the Asia Pacific region. The plant is complementary to its ethoxylation plant in Singapore.

Huntsman closed three manufacturing units at its Whitehaven, UK, surfactants site last year. The units produced tertiary amines, ethoxylates and detergent-range alcohols. The company is currently evaluating its surfactants production network with the goal of optimizing its manufacturing asset bases in each region. The company has four alkoxylation manufacturing units in North America and is examining its manufacturing strategy. It expects to have a final decision and recommendation by the end of the first half of this year. Company-wide, Huntsman has targeted $200 million in cost reductions for 2004, which is in addition to the $150 million in ongoing annual cost reductions achieved in 2001.

As part of an asset rationalization program, Dow shut down its Institute, W.Va., manufacturing facility last year. The facility produced alkoxylated surfactant products. The company still has significant surfactant capacity.

Last year, BASF sold its ester, alkoxylates and silicones surfactant manufacturing site in Gurnee, Ill., to Fernandina Beach, Fla.-based Petro-ferm Inc. Lambent Technologies Corp., a subsidiary of Petroferm, will operate the plant and supply BASF with surfactants under a long-term toll manufacturing agreement.

BASF says it remains committed to its surfactants business. "BASF is both dedicated and has a strong commitment to this industry," says Tony Latella, business director, consumer specialties, performance chemicals group, BASF. "We have made enhancements to our new Geismar, La., surfactants facility that improved overall efficiency and capabilities for high-volume nonionics." Last October, BASF also announced that it had increased capacity for dimethylaminopropylamine, an intermediate for certain specialty surfactants used in personal care products, by 4,000 metric tons to 21,000 metrics per year at its facility in Ludwigshafen, Germany.

And earlier this month, Stepan Company warned that it would take a $3.5 million to $4.0 million loss in the fourth quarter 2003, in part due to the difficult conditions in its surfactants business. "Business conditions, particularly within our surfactant group, remain slower than anticipated, and margins continue to be under pressure from higher raw material costs," says F. Quinn Stepan, chairman and CEO of Stepan.

Product Development

Despite the pressures, producers continue product innovation, particularly in specialty areas. As an example, BASF has developed new nonionic surfactants to provide better cold-water solubility and cleaning. In the dishwashing segment, BASF has some new low-foam nonionic surfactants that it says better protect and clean plastics items than conventional nonionics. It is also developing nonionics based on new hydrophobes such as (alpha-branched) C10-Guerbet alcohols. These products are environment-friendly alternatives to the alkyl phenol ethoxylates, and can be used in hard-surface cleaners.

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