Tall oil fractionators restructure

05 March 2007 00:00  [Source: ICB Americas]

THE US and European crude tall oil (CTO) fractionation industry continues its restructuring and consolidation. Last year saw the buyout of Forchem, while Arizona Chemical's $485m sale has been completed.

After being for sale since 2005, Arizona Chemical is now owned by private equity firm Rhone Capital III. International Paper, Arizona Chemical's parent company, says it will acquire a 10% minority stake as part of the deal.

Arizona Chemical will operate as a stand-alone entity going forward. "Our first priority is to implement a seamless transition to a stand-alone company with respect to our suppliers and customers," says Alan Phillips, director strategic raw materials for Arizona Chemical.

"We will be reevaluating our long-term strategy as it relates to our overall business but our core strengths of CTO fractionation and upgrading will continue to be the fundamental plank in our business model."

Phillips says it expects no major changes with respect to operations and management, "although services currently provided by International Paper must now be managed by Arizona Chemical," he adds.

Arizona Chemical has been in an ongoing restructuring mode for the past several years.

Between 2001 and 2005, the company closed a total of 60,000 tonnes/year CTO fractionation capacity in the US and an estimated 170,000 tonnes/year in Europe. Reductions include the 50,000 tonne/year plant in Moss, Norway, in September 2005.

Industry sources note that Arizona Chemical offset some of its capacity reductions with increases at their facilities in Sandarne, Sweden, and Oulu, Finland.

Part of the company's closures in Europe was blamed on excess capacity in the region, especially when Finnish tall oil fractionator Forchem entered the market with a 120,000 tonne/year plant in 2002, which then increased to 175,000 tonnes in late 2005.

Forchem, meanwhile, was recently sold to private equity firm MB Funds by its shareholders, Bio Fund Management, Profits Management, and OKO Venture Capital. The selling price was not disclosed although Forchem's president and CEO, Martti Fredrikson, says it was well above the company's turnover last year of €77m ($101m).

"After five years, Forchem's investors felt it was a proper time for an exit, judging the market condition and the company's accomplishments," he says. "Forchem was really able to utilize the power and scale of its state-of-the-art process and thus deliver good, and above-industry margins last year."

The company occupies 30% of the European CTO fractionation market, says Fredrikson. Arizona Chemical accounts for more than half of the market while DRT and Kemira hold the rest, according to Pennsylvania-based consulting firm International Development Associates (IDA).

CTO fractionation capacity in North America is estimated around 820,000 tonnes/year, reports IDA. Major players include Arizona Chemical (49%), MeadWestvaco (26%), Georgia Pacific (14%), and Eastman (11%).

Georgia Pacific was acquired by Koch Industries for $21bn in late 2005, becoming an indirect, wholly owned subsidiary of the company. MeadWestvaco, meanwhile, was formed from the merger of Westvaco and Mead Corp. in 2001.

MeadWestvaco says it is increasing its tall oil refining capacity in DeRidder, La., by 40%, which is expected to be completed by the third quarter of 2008. The expansion, originally scheduled for completion this summer, was delayed due to contract labor and materials shortages caused by hurricanes Katrina and Rita.

"Efficiencies gained with the expansion will allow the company to continue to buffer its customers in the pine chemicals markets from the full impact of unsustainable CTO price inflation experienced throughout the industry over the past 24 months," says Ed Rose, performance chemicals vice president, MeadWestvaco Specialty Chemicals. "Construction is under way and long-term contracts for CTO are in place."

The outlook for the tall oil business is promising despite the changes that continue to reshape the industry, notes Arizona Chemical's Phillips. "We anticipate the demand for tall oil products to remain strong in 2007. CTO availability, meanwhile, is expected to improve with more pine pulp production and increased black liquor soap/CTO recovery," he adds.

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