Oleochemicals: Oleochem market to see more pricing volatility ahead

26 March 2012 00:00  [Source: ICB]

The oleochemical industry expects another roller-coaster ride this year, driven by continued volatile fats and oils feedstock prices, uncertainties in Indonesia's export tax situation, and a gloomy global economy.

Unpredictable lauric oil prices look set to continue, with palm kernel oil prices increasingly likely to demonstrate volatility and affect the oleochemical market in the short term, said Harald Sauthoff, vice president for global procurement of natural oils and oleochemicals at Germany-based BASF.

Palm leaves, Rex Features

 © Rex Features

The push towards the use of sustainably certified palm oil products could cause near-term price disruptions

One driver is the palm industry's increased push towards the use of sustainably certified palm oil products, which would likely create a "two-tier market structure" driving palm products' price volatility.

"An increased need for palm oil plantations to meet sustainability criteria relating to social, environmental and economic good practice will impact liquidity, resulting in volatile pricing patterns for the commodity," Sauthoff said. "With the market in the midst of a transformation, a two-tier structure will likely exist until certified oil is the new norm and markets go back to a one-tier structure."

Sauthoff, who spoke earlier this month at the Palm and Lauric Oils Price Outlook conference in Kuala Lumpur, Malaysia, also noted the increased influence of economic sentiment on the volatility of agricultural commodity markets.

Since the 2008 economic crisis began, correlation between lauric oil prices and the US Dow Jones Industrial Average has increased significantly. Lauric oils traded at $1,000-2,350/tonne (€755-1,744/tonne) CIF (cost, insurance and freight) Rotterdam during 2011.

With greater unpredictability in the market than ever before, Sauthoff predicted a wide price range to continue throughout 2012.

PALM, PETROLEUM LINK

Crude palm oil (CPO) prices have become increasingly linked to the pricing of petroleum products, said James Fry, chairman of UK-based agribusiness consultancy LMC International, who also spoke at the conference. He added that supply and demand fundamentals are no longer the determining factor for CPO prices.

"Since 2007, vegetable oil and petroleum prices had become increasingly connected, with the prices of palm, soy, and rapeseed oils in Europe all trading in a similar pattern to that set by Brent crude," said Fry. "With the spread becoming even more aligned recently, the price band linking the prices of vegetable oils to those of petroleum products was still very much alive."

Concerns over the global economy and ongoing worries over limited supplies from Iran have pushed prices of Brent crude oil over $126/bbl as of March 16. Vegetable oil prices still trade at a premium to Brent but they tend to move in step after a slight time lag, he noted.

Fry anticipates the premium of CPO over Brent crude to rise imminently, predicting CPO to peak at Malaysian Ringgit (M$) 3,360/tonne ($1,108/tonne) if crude prices remain at current high levels.

As of March 21, the Bursa Malaysia CPO March delivery contract settled at M$3,367/tonne, up from M$3,217 on March 7 when Fry spoke at the conference.

IMBALANCED MARKET?

While volatile palm oil pricing will continue to rock the global oleochemical boat, supply and demand fundamentals are also expected to change as Indonesia gears itself to become a cost-competitive oleochemical producer through government incentives for processed palm oil.

Lower taxes introduced by the Indonesian government for palm oil refiners are likely to attract more oleochemical producers to locate to the country, leading to an oversupply of fatty alcohols and acids in the market, said Alan Brunskill, an independent UK-based oleochemical consultant, who also spoke at the conference.

Malaysia palm oil pricesIn September 2011, the Indonesian government lowered its export tax on refined palm oil products from 25% to 13%, while the export tax on CPO was reduced by a far lesser extent, from 25% to 22.5%. This has given Indonesian palm oil refiners a big advantage versus its Malaysian competitors.

Brunskill said the fall in the duties allowed Indonesian oleochemical producers to "more or less offset their production costs."

With producers elsewhere increasingly hampered by high feedstock and production costs, Brunskill said there was now a huge incentive for Indonesian producers to build further refining capacity in Indonesia.

"The Indonesia export tax will skew capacity development to this region," he said. Despite consumption of fatty acids and alcohols continuing to rise globally, Brunskill pointed out that growth levels are starting to stagnate.

"With demand in Europe and America particularly flat, the excess capacity would need to be absorbed by developing nations, where demand levels are increasing at a greater rate," he said. "Crude palm and crude palm kernel oil volumes continue to grow at levels not likely to cause availability problems at present; however, the capacity growth is forecast to outstrip market growth."

Brunskill predicted an additional 1.8m tonnes of fatty acid capacity will be operational by 2015, mostly coming from Indonesia. Global fatty alcohol capacity will see an additional 800,000 tonnes in the same period.

  • Additional reporting by Doris de Guzman in New York.

By: Neha Popat
+44 208 652 3214



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