FocusBiofuels alter US oleochemicals market

26 July 2007 22:59  [Source: ICIS news]

By Judith Taylor

HOUSTON (ICIS news)--Buyers and suppliers in US oleochemicals are beginning to blame biofuels for drastically driving up prices of shared feedstocks, a surge that may force changes in the existing pricing structures, sources said on Thursday.

“Suppliers are saying veg-oil and beef tallow costs are up 50-60%,” one large volume fatty alcohol buyer said.

Key oleochemical feedstock include crude palm oil (CPO), typically sourced from Asia, palm kernel oil (PKO), and bleachable fancy tallow (BFT), which is sourced domestically from the US midwest. These feedstocks are also used to make biodiesel fuels or are influenced by the biodiesel market.

Market sources said BFT prices in Chicago were in the low to mid 30s cents/lb, having jumped from the low 20s cents/lb in June.

CPO was trading at $715-720/tonne FOB (free on board) southeast Asia the first week in July, rising about $50/tonne by the third week to trade at $770-780/tonne, according to the Malaysian Palm Board.

The dramatic increases have pushed up producers' price ideas for oleochemicals.

“The sellers are telling us they have to pass on these high feedstock costs,” another alcohol buyer said.

Fatty alcohol producers have announced their intention to hike third-quarter contract prices by 12-15 cents/lb ($265-331/tonne), or around 10%. Those initiatives are now in heated negotiations with buyers, as buyers counter that upcoming new capacity in Asia will soften the market by the fourth quarter.

Likewise, fatty acid producers announced July price hike initiatives of up to 8 cents/lb on most C18 products, many of which are used in detergent and personal care end-uses.

Moreover, producers are seriously considering making fundamental changes in the way contracts are structured in order to remove the use of prior-quarter averages in the fats market as a factor.  

Third-quarter glycerine contracts rose by about 9 cents/lb, with July assessed at 43-49 cents/lb for vegetable material and 41-46 cents/lb for tallow-based, according to global market intelligence service ICIS pricing.

Underpinning each tier of price movement were tight supply and rising costs of feedstock fats and oils, sources from each market segment confirmed.

This same situation exists in the related fatty acids market. However, the domestic tallow feedstock issue is significant because the US has a large, viable soap and detergent manufacturing segment that uses tallow for soap production as well as fatty acids.

Soap, tallow, fatty acids and fatty alcohols were largely unaffected by the gyrations and fluctuations of global energy markets for years, even while tap-dancing along with most other US manufacturing industries on rising and volatile natural-gas prices.

However, the sustained surge in crude oil prices in recent years, and the political angst in the US over its foreign policy entanglements associated with its dependency on Middle East oil, opened the door wide for a biofuels boom that is now spilling over into oleochemicals.

Public focus has mainly been on ethanol, but biodiesel  is also making a global impact. Both have burst on the agricultural stage to compete with traditional food markets in feedstock vegetable oils and fats.

On the back of huge ethanol demand for feedstock, US corn prices have surged.

Front-month September corn futures on the Chicago Board of Trade (CBOT) settled on 26 July at $3.17/bushel, up 6 cents from the previous close. The surge in corn prices began on or around August 2006, following the oxygenate switch to ethanol and forming the leading edge of the biofuels boost.  

Crude soybean oil’s front-month August futures on CBOT settled at 36.59 cents/lb on 26 July, down slightly from the previous close. However, it was well above prices that biodiesel producers consider margin viable.

Biodiesel producers use refined soybean oil, which has about a 5 cent premium over crude. Biodiesel producers consider refined soybean oil prices over 40 cents to present unsustainable margins. Today’s refined bean oil prices would be about 40-41 cents/lb.

The high agricultural commodity prices are provoking disbelief in the oleochemical market, long used to far lower and more stable feedstock costs.

Meanwhile, there is no relief from the petroleum side, where crude oil futures for benchmark West Texas Intermediate (WTI) settled on Thursday at $74.95/bbl on the NYMEX. Crude has displayed up/down volatility over the week, varying as much as $2/bbl in day-to-day closes.

“Is this for real?” one fatty alcohol player asked.   

Other market participants in the fats and oils area are asking the same question, and wondering how and when the intersect of the fats and oils feedstocks for biofuels with ever rising crude oil cost is going to find its balance.
By: Judith Taylor
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