OUTLOOK '08: Asia glycerine prices to stay strong

02 January 2008 07:33  [Source: ICIS news]

By Jeremiah Chan

SINGAPORE (ICIS news)--Refined glycerine prices in Asia are expected to remain high next year on strong demand and tight supply, after hitting a peak in 2007, producers and traders said on Wednesday.

"The days of $600/tonne (€414/tonne) glycerine are over," a major glycerine producer said, echoing the sentiment among most market players in Asia.

Refined glycerine prices surged to $1,700/tonne FOB (free on board) southeast Asia (SE Asia) in December on a scarcity in supply - a far cry from levels last seen in the first quarter of the year when cargoes were offered around the $600/tonne mark.

The global shortage of glycerine started earlier this year when biodiesel production rates in Asia and Europe fell on the back of unsustainably high upstream vegetable oil costs. The supply of competitively priced co-product crude glycerine subsequently dried up, leading to a sudden drought of refined molecules.

Similarly, a cut in fatty acid production rates on lacklustre demand reduced its co-product glycerine output. One unit of glycerine is produced for every 10 units of biodiesel or fatty acid made.

Exacerbating the shortage was a global boom in demand for the commodity, as technological advances led to new commercial applications for the product. This resulted in a clamour for cargoes, especially from speculative traders predicting ever higher prices in the near future.

This increase in demand will likely be a price booster in 2008, although it could be mitigated by a recovery in supply.

European demand would also be a key driver of prices. With the region currently dependent on Asian supply of glycerine and willing to pay top dollar for cargoes, Asian producers began diverting more cargoes to the region.

"Why leave money on the table, when the Europeans are willing to pay more than $1,800/tonne FOB [for bulk cargoes]?" a marketing official at a major glycerine producer said which explained the fewer allocations to the Asian market.

In addition, Chinese imports of material are expected to surge following China’s Ministry of Finance announcing a cut in glycerine import duties to 5% from 14% in 2008.

Producers and traders agreed that glycerine prices could subside in the coming year if government legislation or subsidies allow biodiesel production to be profitable again.

There has been much talk from governments mulling compulsory use of the biofuel or the use of subsidies to encourage biodiesel use, consequently increasing the crude glycerine supply to the region.

Some traders and producers dismissed such notions, however.

"These [government] initiatives will probably not happen. If subsidies are introduced, who will be willing to pay for them?" a major glycerine trader said, adding that the rumours of government action were "all talk and no action".

Producers and end-users alike will also be watching the feedstock vegetable oil market very carefully as a dip in raw material prices would have a huge impact on the industry.

Lower upstream costs would ease fatty acids prices, boosting demand in the market and helping to increase the supply of glycerine to the market.

In any case, market sources agreed that the days of cheap surplus glycerine seen as an excess product from biodiesel, soap or oleochemical production were long over.

"If [the glycerine shortage] keeps up, biodiesel will soon become a by-product of glycerine production rather than the other way round," the marketing official from a biodiesel producer said.

($1 = €0.69)

By: Jeremiah Chan
+65 6780 4359

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