CTO and Derivatives Market Still Pressured on Long Supply and Weak Demand

26 May 2003 00:00  [Source: ICB Americas]

The markets for tall oil and derivatives are still pressured by continuously long crude tall oil (CTO) supply and weak domestic demand for fractionated products. Overstock of CTO remains a problem for fractionators as storage capacities are now above targeted maximum levels. Current fractionation rates remain steady at 75 to 80 percent with lackluster demand in the wake of weak economic conditions.

"Industry-wide, CTO inventories are now at very high levels compared to last year," says one major fractionator. "We are seeing a fairly long trend toward increasing inventories, which started last year, and it is going to a point where storage capacity is just running out. Some fractionators that are short of storage space are now selling CTO to other players," the fractionator adds.

Compared to 2001, average crude tall oil stocks in 2002 were 19 percent higher at 163 million pounds, according to the US Census Bureau. From January to March 2003, average CTO stocks, placed at 166.5 million pounds, were up 7 percent compared to the same period last year, and up 34 percent from 124 million pounds in 2001. Cyclically, the fourth quarter and first quarter periods were considered high CTO production seasons. However, with CTO stocks piling up throughout 2002, suppliers say the industry is entering a period of very long CTO supplies unless demand for derivatives improves.

"Demand for tall oil fatty acids (TOFA) has been soft for us for a while, and demand for tall oil rosins (TOR) has also been soft for our competitors," says another fractionator. "Unless sales for tall oil derivatives took off, we're going to see excess CTO for the rest of the year."

One supplier also notes that the 40,000 ton reduction of North Ameri-can fractionation capacity this year, resulting from Eastman Chemical Company's planned consolidation of its tall oil operations, is further pressuring CTO inventories. Eastman will close its 70,000 ton-per year CTO fractionation capacity in Savannah, Ga., and at the same time expand its Franklin, Va., capacity from 70,000 to 100,000 tons per year. The consolidation is expected to be completed by July. Total CTO fractionation capacity in North Ameri-ca after Eastman's consolidation is estimated at 847,000 tons per year.

Meanwhile, CTO exports to Europe and Asia have alleviated some of the pressures, say most suppliers, although not enough to stabilize the sagging market. "The situation would have been even worse except for the fact that significant volumes have been exported from North America to Europe," one major fractionator notes. "We are trying to monitor very closely the off-take of CTO by the European market as the industry would have a very serious inventory problem if they are going to stop taking CTO from us."

Finland and Norway are currently the largest importers of US tall oil this year. As of March, total US exports of crude or refined tall oil were around 22 million pounds valued at $6 million. Norway and Finland each account for 19 percent of the total US exports, followed by Japan (17 percent), South Africa (14 percent) and the Nether-lands (12 percent). Last year, total US tall oil exports reached 63 million pounds with an export value of $20.5 million. Japan was the largest tall oil importer last year accounting for more than half of US exports, according to the US Census.

One factor affecting European de-mand for US CTO imports is the addition of fractionation capacity in Finland, according to a supplier. For-chem Oy, a new tall oil player in Western Europe, started up its new tall oil distillation plant in Rauma, Finland, last November. Said to be the largest in the world, the plant produces 150,000 tons of distilled tall oil products per year, accounting for 10 percent of the total global CTO fractionation capacity.

In terms of pricing, crude tall oil price remains at the $90 to $100 per ton level, with refined distilled CTO placed at 32 to 33 cents per pound range. Unrefined distilled CTO is at 25 to 27 cents per pound range. Suppliers did not comment on any pricing outlook although one fractionator says there has been a recent move in the industry for additional price reductions for CTO that failed. For tall oil derivatives, Georgia-Pacific Resins has recently increased its TOFA pricing by 2 cents per pound and TOR by 3 cents per pound effective May 15. The company also increased its rosin esters pricing by 5 percent.

Georgia-Pacific officials were not available for comment with regards to the factors for the price increase. One industry source notes that with the current market conditions and recent increase in energy prices, price in-creases are necessary for fractionators to remain in business. Other fractionators declined to comment on any price increase initiatives for their tall oil products.

Current pricing for TOFA with 2 percent or more rosin acids is currently placed at the mid-20 cents per pound range. Prices for TOFA with less than 2 percent rosin acids are placed at the low 30 cents per pound range. For TOR, prices were not quoted. The last price increase initiatives seen for TOR were in late 2000 by Hercules Inc. and Arizona Chemical Company. The price increases were necessitated by increases in energy and raw material costs that year.

In 2000, North American consumption of TOR peaked at 215,820 tons and then declined to 149,239 tons in 2001, according to a study from the Mendenhall, Pa.-based consultancy, International Development Associates (IDA) Inc. Consumption is said to re-cover slightly in 2002 reaching 188,639 tons by December. "While this does not represent a vigorous increase in North American domestic demand, it is an encouraging sign," says D.F. Stauffer, president of IDA. "Export/ import statistics for the current year-to-date indicate that this trend will continue," he adds.

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