Asia's palm oil derivatives market takes a hit from biodiesel and oleochemicals

Palm slapped

22 April 2009 00:00  [Source: ICB]

Asia's palm-based biodiesel and oleochemicals markets haved been hit by myriad challenges. What does the future hold?

MENTIONING THE humble palm tree to the man on the street more often than not brings to brings to mind visions of summer vacations at idyllic beaches. In Asia, however, the palm tree has evolved to become far more than an anchor for vacationers to hang their hammocks on.

Transesterified palm oil, or palm-based biodiesel, has proven to be a feasible alternative to conventional diesel in various countries that have mandated or subsidized the use of renewable fuels.

However, with lower energy prices, high natural oil prices, weak demand for oleochemicals and the unique challenges for Asia's biodiesel industry, the palm-based derivatives market is getting slapped around.

Palm trees' clusters of fruit are harvested in order to produce palm vegetable oil. Edible palm oil is the world's most widely used vegetable oil for cooking purposes, with soybean oil coming a close second, according to data from the US Department of Agriculture.

Besides food, crude palm oil (CPO) can be fractionated and refined into fatty acids and fatty alcohols, which can be substituted for petrochemical products for manufacturing a myriad of consumer end-use products.

The tropical Southeast Asian archipelagos of Malaysia and Indonesia are the world's largest planters of oil palms, as well as the most active producers and sellers of its derivative products, with millions of workers employed in the CPO and downstream industries.

CPO has also been commoditized, with the Crude Palm Oil Futures contract traded on the Bursa Malaysia exchange, which is regarded as one of the key price benchmarks in the world vegetable oils market due to its ample liquidity.

Malaysian palm oil and derivative product exports accounted for ringgit (M$) 64.8bn ($17.9bn) or 9.8% of the nation's total exports in 2008, the second-largest export sector, behind electrical and electronic products, according to the Malaysia Statistics Department.

In the past few months, however, almost no export-oriented economy has been spared by the recession.

A combination of various factors has left the oleochemical industry hurt by ailing demand, with downstream production in a spectrum of industries screeching to a halt: Production margins were already severely squeezed by the recent uptrend in CPO levels compounded by poor supply-demand fundamentals due to the trading activities of speculators who are heavily vested in the upstream vegetable oils market. And the rapidity of feedstock price movements has also capped demand, keeping most oleochemical buyers sidelined.

OLEOCHEMICAL DEMAND TEETERING

Traders and producers agree that 2009 will be a tough year for most oleochemical manufacturers.

Demand for southeast Asian palm-based fractionated fatty acids has fallen by up to 30% since the beginning of 2009, sellers report. As a result, operating rates at various Asian oleochemical production plants have been slashed in a bid to curb inventory pressure.

The natural fatty alcohols market has also not been spared by the falloff in demand, with large multinational corporation end-users reported to have been offloading their excess fatty alcohol inventories procured earlier - also due to growing stockpiles of unneeded cargos.

Major producers of detergents and personal care products such as UK and Netherlands-based Unilever, Japan's Kao and US-based Procter & Gamble have made pledges to go green by making use of surfactants made from renewable feedstocks instead of their petrochemical-based synthetic alternatives such as linear alkyl benzene (LAB).

Initially, there was optimism that end-user demand would not be too adversely affected.

"No matter how bad the recession is, people still have to bathe and wash their clothes," says Rugvedaya Dubhashi, the general marketing manager of India-based fatty alcohol major Godrej Industries.

On the other hand, hikes in vegetable oil prices in recent months resulted in upward movements in natural fatty alcohol offers, amid comparatively less extreme movements in crude oil values.

As a result, several natural fatty alcohol sellers have attributed part of the falling demand to quiet reformulations from detergent and personal care product manufacturers to include more synthetic chemicals because of the cost savings due to more competitive pricing.

"In today's economic climate, everybody is trying to cut costs. Yes, we have lost some market share to synthetics," one seller from Indonesia points out, adding that several natural fatty alcohol producers in Asia are running at around only 50-60% of their nameplate capacities.

PALM BIODIESEL CHALLENGES

It looks good on paper - ample availability of a renewable crop that can be processed into an alternative to the finite supply of traditional fossil fuels.

With statistics released by the Malaysian Palm Oil Board showing Malaysian excess stockpiles of palm oil at 1.4m tonnes as of the end of March, it seems rather straightforward to process the CPO into biodiesel for either domestic use or for exports to European countries that have mandated the use of biodiesel for transportation.

The 92 licenses issued by the Malaysian government to local companies allowing them to produce 10.2m tonnes/year of biodiesel would also paint a glowing portrait of the growth of the Malaysian biodiesel industry.

On the other hand, the plummeting value of mineral crude, from highs last summer approaching $150/bbl to current prices of around $50/bbl, have quickly dampened the fervor for alternative fuel use.

"There are 16 plants on the ground from 92 licenses issued [in Malaysia], with most unable to operate due to negative margins," said UR Unnithan, executive director of Malaysian biodiesel producer Carotino, adding that only five or six of the plants were running regularly over the past two years, and mostly well below nameplate capacities.

The uncertainties on whether palm biodiesel would count against strict sustainability criteria set by the EU weighed on European demand for Asian palm-based material. The $300/tonne tax credit for US exports to Europe also sidelined most Asian biodiesel producers from off-loading their cargoes.

"There is no way that we can sell our material now with CPO so high and crude oil so low," the trading manager of a Malaysian biodiesel producer said.

Further dampening the Asian biodiesel export market was the advent of new ASTM standards announced late last year for biodiesel use in the US, which requires both domestically produced as well as imported cargos to pass a "cold soak" test, with which most southeast Asian palm-based material is unable to comply to due to its higher cold filter plugging point without substantial capital investment.

DOMESTIC USE HINDERED

Domestic demand in Indonesia and Malaysia was also soft, with previous attempts to mandate biofuel demand coming stymied by logistics and financial difficulties, as the hikes in vegetable oil prices rendered biodiesel use economically unfeasible.

Malaysian Minister of Plantation Industries and Commodities Peter Chin lays some of the blame for delays in the implementation of earlier announced plans for a 5% biodiesel blend on technical complications from oil companies in blending the biodiesel for commercial use.

"Petronas is not ready [to blend]. While they are working with us, they are not 100% ready - neither is Shell, nor is Exxon. We have to give them time to adjust to this new environment," Chin says.

Managing director of Malaysia's integrated oleochemicals firm Future Prelude, Jake Sow, whose biodiesel project in Pulau Indah, Malaysia, is under construction and tentatively scheduled to be completed by late 2009, also points out the general lethargy in the industry.

"It seems like a good thing that our plant is delayed. Everybody I've met tells me that the market is really bad now," Sow says.

Jeremiah Chan is a markets editor for ICIS pricing, and covers the Asian oleochemicals, biodiesel and bisphenol A markets from Singapore.

For price and market updates to the Asia biodiesel market


By: Jeremiah Chan
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