Tall Oil Market in Balance As Derivatives Demand Improves

22 March 2004 00:01  [Source: ICB Americas]

Despite ongoing long inventories for crude tall oil (CTO), the market is shaping up as demand for downstream derivatives sees significant improvement. Demand for tall oil fatty acids (TOFA) and TOFA derivatives, as well as tall oil rosin-based resins are said to be picking up, mostly because of improved economic activity. Recent increases in vegetable oil-based fatty acids prices have also made TOFA more competitive in the fatty acids market. One producer also notes new demand for TOFA derivatives in some nontraditional markets.

"One thing that has changed from last year's scenario is that demand for tall oil derivatives seems to be strengthening, which is keeping CTO supplies from becoming a problem," says a CTO fractionator. "We are currently at a point in the year where CTO production is traditionally high. Increased pulping rates because of higher demand for pine has also resulted in increased CTO supply."

Substantial export quantities of tall oil have also helped ease up CTO oversupply in the US. In 2003, total US tall oil exports, whether crude or refined, totaled around 77,390 tons, more than twice the 28,560 tons of 2002, according to the US Census Bureau. Total import demand from Sweden last year surged to 35,570 tons compared to 1,450 tons in 2002. Norway also became a significant consumer of US tall oil last year with total imports of 3,850 tons. Traditional consumers of US CTO such as Canada, Mexico, South Africa and the United Kingdom also increased their imports in 2003.

"CTO imports to Europe were up as European demand for fractionated products increased largely due to the vegetable fatty acid situation corresponding to high vegetable oil costs," notes one observer. "Increased fractionation capacity in Europe has also benefited US CTO suppliers, especially with the low rate of dollars against euro making US materials more attractive," he adds.
In Europe, despite the upswing in derivatives demand, the overall market for tall oil is said to be flat, with some pressure on prices owing to the arrival of Forchem Oy. Forchem started up its new 100,000 tons-per-year CTO fractionation plant in Rauma, Finland, in late 2002. With excess fractionation capacity in Europe, re-structuring continues to take place, this time with the closure of Arizona Chemical Company's Valke, Finland, refinery last April. Fractionation capac-ity of the plant was placed at around 40,000 tons per year.

Industry consolidation and restructuring are also expected to continue in the US. Last year, Eastman Chemical Company closed down its Savannah, Ga., fractionation plant, which had a capacity of 70,000 tons per year. The shutdown, recent temporary outages at Eastman's Franklin, Va., plant and the current increase in derivatives demand have helped improved industry-wide operating rates, says one fractionator.  The current industry fractionation rate is put in the 80 to 90 percent range, as compared to last year's range of 75 to 80 percent. Another fractionator notes that some plants are running above 90 percent as a result of improved demand for finished tall oil products.

As for pricing, CTO remained flat throughout 2003, owing to continued oversupply in the market. Pricing for CTO has declined in the last two years from $105 per ton average in 2002 to the current $95 per ton average. "The oversupply appears to have created a more uniform price in the marketplace for CTO," says one fractionator. "Today, many suppliers are not receiving the premiums for their CTO compared to what they received when markets were tighter."

Some industry observers say that the CTO price for 2004 is expected to remain at the same level. Prices for finished tall oil products such as TOFA and tall oil rosin resins, however, are expected to firm up this year as demand continues to strengthen. Current pricing for TOFA with 2 percent or more rosin acids is placed in the mid-20 cents per pound range, while the price of TOFA with less than 2 percent rosin acids is in the low-30 cents per pound level.

"A stronger economy should result in improved demand for tall oil products, which should, in turn, result in increasing prices for TOFA and rosin," says one fractionator. Higher energy and transportation costs that have impacted fractionators' profitability during the last two years could also contribute to the need for price adjustments within the derivatives sector, another fractionator notes.
Among downstream producers, Georgia-Pacific Resins Inc. was the first to announce its intention to increase prices on tall oil products this year. The company will raise prices on its XTOL TOFA products line by 1.5 cents per pound effective April 1. Georgia-Pacific did not comment on the factors driving the price increase.

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