Chemical Profile Tall Oil

27 January 2003 00:00  [Source: ICB Americas]

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TALL OIL   January 27, 2003

PRODUCER	CAPACITY*
Arizona Chemical, Panama City, Fla.	80,000
Arizona Chemical, Port St. Joe, Fla.	110,000
Arizona Chemical, Savannah, Ga.	120,000
Eastman Chemical, Franklin, Va.	75,000
Eastman Chemical, Savannah, Ga.	75,000
Georgia-Pacific, Crossett, Ark.	130,000
Hercules, Burlington, Ontario, Canada	20,000
MeadWestvaco, Charleston Heights, S.C.	115,000
MeadWestvaco, De Ridder, La.	100,000
Total	825,000

*Short tons per year of fractionation capacity in terms of crude tall oil (CTO) input. CTO originates as tall oil soap, which is separated from recovered black liquor in the Kraft pulping process. The soap is converted to CTO by acidulation with sulfuric acid. The tall oil is then fractionated by distillation to produce tall oil fatty acids (TOFA), rosin and pitch. Most plants can operate beyond their indicated capacities. In 2001, Arizona Chemical Company closed its plant at Oakdale, La., eliminating 60,000 tons of capacity. That same year, Eastman Chemical Company acquired Hercules Inc.'s tall oil fractionating plants in Franklin, Va., and Savannah, Ga. Eastman subsequently announced that it would close the Savannah unit and expand the Franklin unit to 100,000 tons capacity. Both actions are to be completed later this year. Last year Georgia-Pacific Corp. increased the capacity of its Crossett, Ark., plant by 10,000 tons per year, raising the total capacity to 130,000 tons per year. MeadWestvaco Corp. was formed in February 2002 with the merger of Mead Corp. and Westvaco Corp. The two tall oil plants at Charleston Heights, S.C., and De Ridder, La., having a combined capacity of 215,000 tons per year, had been assets of Westvaco. Profile last published 5/15/00; this revision 1/27/03.

DEMAND
2001: 685,000 short tons; 2002: 690,000 short tons; 2006: 720,000 short tons, projected. Demand equals production plus imports (2001: 25,000 short tons; 2002: 17,000 short tons) less exports (2001: 63,000 short tons; 2002: 30,000 short tons).

GROWTH
Historical (1997-2002): -4.9 percent per year; Future: 1 percent per year through 2006.

PRICE
Historical (1997-2002): High, $160 per ton, crude tall oil, Southeast tanks, works, frt. equald.; low, $90, same basis. Current: $90 to $100, same basis.

USES

Tall oil rosin, 33 percent; tall oil fatty acids, 30 percent; tall oil pitch, 28 percent; distilled tall oil, 9 percent.

STRENGTH
The closing of Eastman Chemical's Savannah, Ga., fractionation plant later this year will help maintain balance in the CTO market. Eastman plans to completely close its 70,000 ton-per-year CTO fractionation capacity at Savannah while expanding its Franklin, Va., capacity from 70,000 tons to 100,000 tons per year-a net capacity decrease of 40,000 tons per year. Firmer vegetable oil prices will make TOFA more competitive in 2003, especially in the C18 oleic fatty acid market. Sunflower and rapeseed oils are seeing upward price movement following lower global production. The strengthening of the vegetable oil market is pushing competitive fatty acid demand upwards. In the last two months, crude soybean oil prices jumped almost 50 percent, compared to prices seen in the first quarter of 2002. Similarly, prices for sunflower seed oil, canola oil, cottonseed oil and corn oil all rallied last year.

WEAKNESS
CTO inventories have been long through the second half of 2002, forcing prices down by $10 per ton to the current range of $90 per ton to $100 per ton. For more than two years, prices had been stable at around $100 per ton to $110 per ton. Meanwhile, demand for CTO derivatives remains flat with industry operating rates at the 75 percent to 80 percent level. Almost all of the CTO is used to produce rosin and fatty acids, rather than consumed as such. Consequently, its price is dependent on rosin and TOFA demand. The TOFA market began showing signs of weakening in the second half of 2001, mainly because of the general economic slump. Poor market conditions, compounded by historically low prices for competitive vegetable oils over the past two to three years, have pushed some TOFA consumers to move to lower-priced vegetable oil-based fatty acids. In addition, because crude tall oil is a by-product of the production of wood pulp from Southern pine trees, demand for pulp, rather than TOFA demand, largely drives CTO supply. With a slight improvement in the pulping industry's operating rate last year compared to 2001, CTO production is likewise up. But because of the weak demand situation for rosin and TOFA, inventories have continued to build.

OUTLOOK
Consolidation and flat demand, two major themes seen in the CTO market in 2001 and 2002, are expected to be in play again in 2003. In 2001, the market was relatively well balanced as plant consolidations matched declining market demand and pulp mills cut their operating rates in response to the soft economy. In 2003 another 40,000 tons of capacity are scheduled to be rationalized by Eastman Chemical, which will help bring installed capacity in line with continuing depressed market demand. The supply-side will be long, however, with improving pulp mill operating rates turning out proportionately more CTO, putting more downward pressure on prices. Demand growth for CTO is projected to be 1 percent per year for the forecast period, in anticipation of improving TOFA demand due to firmer pricing in the competing vegetable oil sector.

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