Market outlook: AkzoNobel strikes green supply deal

07 June 2013 10:02  [Source: ICB]

AkzoNobel cooperates with Solvay for the supply of an epoxy resin feedstock even though they have no direct commercial relationship for the product

Dutch coatings maker AkzoNobel and French group Solvay have struck an innovative deal for the supply of renewable-based epichlorohydrin from 2013-2016. Under the deal - one of the first of its kind in the chemicals sector - AkzoNobel will guarantee to buy volumes of glycerine-based epichlorohydrin indirectly via the epoxy resins it purchases from Solvay's customers.


 AkzoNobel looks at how product cycles and renewable feedstock supply chains are linked

AkzoNobel will use the increased supply of the bio-based product, known as Epicerol, to help meet targets for reducing the carbon footprint of its products. It has a target of a 20-35%/tonne reduction in the C02 used to produce finished product across its portfolio by 2020 with 2012 as the base.

The Epicerol deal will also allow it to increase the proportion of renewable-based epichlorohydrin it uses from around zero at present to 20% by 2016. At present around 7% of the company's feedstock slate (including inorganics) is already bio-based - including traditional products such as cellulose derivatives, fatty acids and natural oils. It plans to double that by 2020.

The company will use a system called "book and claim" (see box) to trace the volume of Epicerol in its products from Solvay via its epoxy resins suppliers. The company consumes epichlorohydrin indirectly via the epoxy resins it buys. AkzoNobel will ask its suppliers to match its demand for bio-based epichlorohydrin with the appropriate supply from Solvay.

Peter Nieuwenhuizen, director of future-proof supply chains at AkzoNobel says: "Many of our suppliers are customers of Solvay who are selling bio-based epichlorohydrin. We wanted to use a "book and claim" approach where you use a paper trail by an external auditor to verify how much bio-based product is in our supply."

For AkzoNobel it is important to be able to work with its suppliers' supplier because few direct suppliers are active in bio-based ­materials. "This relationship [with Solvay] is certainly the most well developed in the bio-based area, but there are others where we're looking at making similar or other arrangements to the same effect," he added. In Latin America, AkzoNobel has an arrangement with Rhodia (now part of Solvay) for butanol and acetone. The group is looking at direct supplies as a solvent, but also indirect purchases to see what whether it can get biobutanol incorporated in butyl acetate.

Like many of its peers, AkzoNobel has been subject to feedstock price volatility, as a large part of what it currently consumes is petrochemical based. The company has undertaken an analysis of its feedstock slate almost back to the wellhead and found that it uses roughly the same amount of methanol, ethylene, propylene and benzene, toluene and xylenes (BTX).

With the current move towards lighter feedstocks, which produce more ethylene, it is likely that the company will face increasing feedstock price pressure. "In a shale gas world, you can immediately see the challenge: overall we're faced with an increasing cost base," says Nieuwenhuizen, adding: "For around two years we've been looking at pressure points in the supply chain. We have good relationships with our suppliers so we'd expect a certain degree of predictability in those relationships."

But two or three years ago, the company was confronted by sudden price increases or sudden supply issues. "This was one of the operational signals we got that we needed to look further down the supply chain. Some of the bottlenecks may not be with our suppliers but with our suppliers' suppliers or their suppliers."

Realising that the company is heavy on BTX meant that it needed to develop a specific strategy for chemicals that it is not even buying and to seek ways to reduce its dependence on the propylene chain. With the switch to lighter feedstocks the price of propylene has risen to parity or above with ethylene.

Nieuwenhuizen said acrylic acid is an example of a product that goes through cycles of heavy investment and then shortages. It is propylene-dependent so there is price pressure all around. The company might buy a number of different latexes, but they all come down to a certain volume of acrylic acid, methyl methacrylate (MMA) and butanol, which relates to propylene.

"So we analyse who is in the butanol, acrylic acid and MMA markets and what can we do? Are we a player of size and could we even make supply arrangements with those players? Should we team up with others or diversify away to other latexes?"

This approach has become part of the "mind set" or culture of the company's corporate sourcing group, analysing the supply chain and what can be done to mitigate risk or price increases.

The development of bio-based feedstocks is an important strand in the company's overall feedstock strategy. According to Nieuwenhuizen, there are three main reasons for focussing on bio-based:

The company sees that bio-based is becoming a mature technology and can offer an alternative for supply that is viable. AkzoNobel would like to be at the forefront of that.

There is demand for sustainable alternatives from end-users, although customers are seldom willing to pay a premium. For this reason, bio-based feedstocks must be cost-competitive.

Carbon footprint reduction is key. AkzoNobel wants to be a sustainability leader.

Nieuwenhuizen still expects there to be price volatility with bio-based feedstocks, especially with first-generation products that are sourcing off food commodities. But second-generation feedstocks should be less volatile, since they are based on waste cellulosics, allowing a real decoupling from other commodity cycles.

Asked why the company is participating in first-generation bio-feedstocks, which are controversial, he says: "You can wait until second-generation sugars are viable and then step in, or you can say that, as we want to be at the forefront of developments, learning as an organisation, we will accept a first-generation feedstock today that is converting worthwhile sugar into a chemical. We have to take a number of steps as a society to learn what works and what doesn't. We require all our partners to work diligently towards second-generation feedstocks."

With some economists predicting that oil prices could collapse to $20-30/bbl, the risk of bio-based feedstocks becoming uncompetitive with petrochemicals is real. Some say photovoltaics may reach cost parity with coal-based electricity by 2020-2030. Then electric vehicles would become more attractive, hitting demand and prices for oil and making naphtha very cheap.

"This could negate any reason to go bio-based. But we have to have a portfolio of options. We can't be sure oil prices will collapse so you need alternatives. Society expects us - as a sustainability leader - to evaluate options for a more sustainable world. I'm asking myself almost every week: are we doing the right thing here? What if? What if? What if?"

Although cellulosic feedstocks would be cheap, Nieuwenhuizen questions whether they could compete with $20/bbl for oil which, he says, is a wonderful raw material for making chemicals and is backed up by an existing depreciated asset base, making it very hard to beat.

He adds: "Contracts might be based on sugar prices rather than propylene and that will require people to think differently so organisational learning is very important. That's difficult in an organisation of 50,000 people. There is a time span to getting a company ready and there are a lot of questions to answer."

For Solvay, the deal with AkzoNobel is unprecedented because it marks the first time it has agreed on a partnership with a company that is two steps away in the value chain concerning a product with which it has no direct commercial relationship. According to Jean-Luc Preat, head of AkzoNobel's biochemical business unit: "We have agreed over five years to increase drastically our targeted tonnage of Epicerol, which will finally be incorporated in their epoxy coatings. So we will work with our customers and they will work with their suppliers."

Bisphenol A (BPA) is combined with epichlorohydrin to produce the epoxy resins required by AkzoNobel. The group supplies epoxy resin to producers such as South Korea's Kukdo and India's Birla Group in Asia and Huntsman in Europe and Asia. He adds: "We will implement 'book and claim' to trace the quantities of Epicerol going into Akzo's epoxy coatings. It's a substantial increase in Epicerol production of between 2013 and 2016 (see table of projects).

For Solvay this a major commitment to renewable technology for this product, allowing it to triple epichlorohydrin capacity. The group has a propylene-based unit in Europe.

"This process is quite competitive - you need less glycerine than propylene to produce the same amount of epichlorohydrin so there is a massive saving on the raw material," says Preat.

In addition the process uses less energy and consumables such as water, so there is a clear advantage, he claims, adding: "Propylene [prices] follow crude, whereas glycerine is a byproduct of biodiesel production. The deal will encourage our epoxy resins customers to source preferably Epicerol from us and facilitate our entrance on the Chinese market and in Asia overall.

What is "book and claim?"
Manufacturers such as AkzoNobel wish to measure accurately the renewable content in their product portfolio. Through "book and claim", it is possible to create a paper trail using an independent third party (such as an accountancy firm), which will indicate the volume of renewable raw materials in a finished product.

By: Will Beacham
+44 20 8652 3214

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