Tall Oil Derivatives Are Up; Future Supply to Fall Short

29 May 2000 00:00  [Source: ICB Americas]

By Alice Naude

Improved demand for tall oil fatty acids and rosin esters has started making its way back up the crude tall oil chain. After reduced production and depressed demand last year, a robust US economy and recovery in Asia are improving consumption rates while production remains steady. Those factors are expected to tighten the market.

"We've started out the year pretty well, better than last year," says Juan Magrans, worldwide business director for the resins and coproducts strategic business unit at Hercules Inc., a fractionator and producer of CTO derivatives. "Right now, supply and demand are in balance overall. However, TOFA (tall oil fatty acids) is tight."

CTO production volumes were lower during the first two months of this year than in the first two months of 1999, according to the Pine Chemicals Association. Last January, production totaled 50,223 short tons, compared to 69,132 short tons in January 1999 and 81,300 in January 1998. In February of this year, 52,801 short tons were produced, compared to 65,868 in the same month last year and 75,922 in February 1988.

"Given this decrease in production, the fact that things aren't tighter indicates that there is still material available in the market and that some market segments have decreased," says Mr. Magrans. "My guess is that some of the business has switched over to hydrocarbons."

Hercules has seen increased demand for TOFA in both the less-than-2-percent and greater-than-2-percent grades. "This started at the end of the third quarter of 1999 and continued through the fourth quarter, though we have not seen additional significant increases in the first quarter of 2000," says Mr. Magrans. "We anticipate that demand will continue as we go into the second and third quarters, which are traditional strong quarters in construction."

Hercules raised its prices for fatty acids and rosin esters at the beginning of the year and is planning to strengthen its prices for tall oil rosin. Price increases were selective and intended to maintain margins. They have been successful, according to Mr. Magrans.

"Right now, the market is in pretty good balance," he says. "It's been fairly stable for about a year in terms of being able to balance supply and demand--this is recognizing that paper mills have decreased production."

CTO originates as tall oil soap, which is separated from recovered black liquor in the Kraft pulping process. The soap is then acidified to yield CTO. After that, the tall oil is fractionated to produce fatty acids, rosin and pitch.

CTO production is dependent on the pulp and paper industry. The production of CTO has declined steadily since early 1998 and it has reached its lowest level in 10 years, mainly because of a curtailment of pulp and paper production.

"Production statistics indicate that about 850,000 tons of tall oil were produced in 1999," says an industry observer. "That's the lowest 12-month rate of production in the last 15 years." He rates annual consumption for CTO at 865,000 to 870,000 tons. "This means that we're looking at a serious supply shortfall," he notes.

The pulp and paper industry is mature, and companies are increasingly pulping younger, farmed pine trees that have a lower chemical content. To encourage tall oil production, CTO fractionators offer engineering support to paper companies that produce tall oil as a byproduct of the pulping process. But according to an industry source, such arrangements have not yet increased production significantly.

Other factors affecting the supply side are that the use of recycled fiber has reduced the growth of Kraft pulp production and that hardwood pulping yields no tall oil. Overall, CTO production has declined, and with no apparent expansion of Southern softwood pulping capacity, potential CTO recovery is capped at current levels and demand may outrun supply over the next few years.

In response, some derivative customers in fast-growing sectors, such as adhesives, have shifted from rosin to hydrocarbon resins to ensure adequate supplies. Because of increases in crude oil prices, many of those hydrocarbons have faced significant pricing pressure during the last few months.

A restructuring of both the paper and fractionating industries is yielding a market with fewer participants, although industry observers say this is unlikely to affect overall CTO production volumes. Last year, Union Camp's CTO production facility in Savannah, Ga., became part of Arizona Chemical's operations after Union Camp was bought by International Paper, the parent of Arizona Chemical.

Last February, Hercules announced it will sell its resins division. "I don't think the change in Hercules' ownership will have much impact," says an industry source. "The new owner is likely to continue operating the business. I doubt they would buy it to close it. And with no change in demand and no changes in production, the sale is unlikely to cause any shifts in the market."

Eastman Chemical is the consensus favorite as a buyer for Hercules' business, although neither Hercules nor Eastman will comment on a possible deal. Eastman has an adhesive resins business and an ink resins business. It acquired the latter when it bought Lawter International Inc. in June 1999. Hercules formerly owned the Lawter ink resins business.

"Eastman is rounding out its product portfolio as an adhesives resins supplier," says an analyst. "If it purchases Hercules' business, it will be able to sell rosin resins and polyterpene resins."

The analyst cites a concurrent consolidation move that could affect CTO supply: International Paper's acquisition of Champion. "Champion supplies CTO to Hercules. With IP (which owns Arizona Chemical) picking up Champion, that puts them in the position of supplying a competitor."

The analyst indicates that all supply agreements have clauses covering such situations. But the analyst notes, "Whenever there is a change in ownership on the paper side, it has the potential of creating problems on the CTO supply side."

Hercules' resins division has roughly $450 million in annual sales and employs about 1,500.

ICIS Copyright © Reed Business Information 2009

< previous article(ICIS Podcast: Chemical News Central 2 November 2009)

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.