OUTLOOK '11: Bumpy ride likely for US oleochemicals

28 December 2010 15:26  [Source: ICIS news]

Bumpy ride likely for oleochemsBy Judith Taylor

HOUSTON (ICIS)--The US oleochemical segment is likely to face a bumpy ride in 2011, as producers cope with feedstock price volatility and uncertainty in glycerine because of the reinstated biodiesel tax credit.

A legislative package extending the biodiesel tax credit to end-2011 and maintaining federal support of the ethanol incentive was signed by President Barack Obama this month.

The ride hasn’t been an easy one for the oleochemical community for several years, with numerous bumps delivered courtesy of biofuels - mostly biodiesel, although ethanol also has played a role.

In many ways,biofuels and oleochemicals lay in the crosshairs of agricultural and petrochemical tiers. Oleochemical production uses the same feedstocks as biofuels: fats, food, oils and greases.

Biodiesel production uses fats and greases, such as tallow and yellow grease, and food oils such as soybean oil and canola (rapeseed). US ethanol production uses corn in quantities that some market sources say affect both the corn and soybean prices, as well as other agro markets including the greases.

Tallow-based fatty acid producers partially blamed multi-feedstock biodiesel production for feedstock bleachable fancy tallow (BFT) grease prices moving up from low-20s cents/lb to mid-30s cents/lb during 2008-2009. This move also shaved margins and brought increased volatility to the co-product glycerine market. The US biodiesel industry fairly collapsed with the expiration of the federal tax credit in December 2009.

In 2010, grease prices continued to rise, and crude glycerine supply tightened on diminishing production rates.

BFT price averages jumped nearly 7 cents/lb ($154/tonne, €117/tonne) between October and November 2010, rising from the mid-30s cents/lb to the low-40s cents/lb.

Grease traders attributed the jump to a prevailing crimp in fats and grease supply in the US, blaming everything from cattle not eating enough corn to grease exports to Europe because of a poor rapeseed crop for biodiesel uses.

Oleochemical production also shares a common co-product with biodiesel: crude glycerine.

Bio-crude - crude glycerine from the biodiesel process - typically contains methanol. Good quality bio-crude is generally agreed to be crude glycerine with no more than 20% methanol content.

Bio-crude glycerine prices ranged from less than 1 cent/lb during 2008-2009 - when the material was either burned or sprayed into coal mines to control dust – up to current prices of about 12-16 cents/lb.

Oleochemical production processes yield a co-product glycerine that is of a higher purity with no methanol residues, often referred to as splitter crude.

Most oleochemical producers directly refine splitter crude up to 99.9% purity and sell the refined glycerine into numerous value-added, commodity end-use markets such as cosmetics, home care products, food and pharmaceuticals.

Some biodiesel producers began to semi-refine the bio-crude glycerine to 89-92% purities, and sell that to oleochemical refiners to take to the higher purity level in order to move the glycerine into value-added end-use segments.

The developing crude glycerine supply symbiosis between the biodiesel industry and the oleochemical industry was cut short by widely-reduced US biodiesel production.

Ready supply was soaked up by improving demand amid a recovering US economy in 2010, tightening crude and refined glycerine supply/demand factors in the fourth quarter of 2010 and the offering of firming price sentiment in first-quarter 2011 contract negotiations.  

Refined glycerine prices moved from the high-20s and low-30s cents/lb in the second half of 2010, and appeared headed toward the mid-30s cents/lb in current first-quarter contract negotiations.

But volatility could erupt in 2011 based upon supply/demand uncertainties.   

If US refined glycerine demand continues to grow and biodiesel production ramps up in an organised fashion - contrary to historical indicators  - then glycerine and fatty acid supply/demand factors could maintain a fair balance in 2011.

But if refined glycerine demand is routinely steady and US biodiesel production increases the flow of bio-crude,  then oversupplied conditions could emerge, invoking similar price volatility seen in 2008-2010.

($1 = €0.76)

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By: Judith Taylor
+1 713 525 2653



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