OUTLOOK ’15: Asia fatty alcohol market faces uncertainty in H1

By Alexis Gan

SINGAPORE (ICIS)–The Asian fatty alcohol market is expected to be mixed in the first half of 2015 because of a slew of new capacities, unpredictable volatility in upstream palm kernel oil (PKO) prices and worries over global economic growth, according to market participants.

Market players are most wary of slower economic growth in China next year, which will likely reduce demand from the current largest consumer for southeast Asian fatty alcohols besides Europe.

According to projections by the International Monetary Fund (IMF) in October 2014, China economic growth is expected to moderate in 2014 to 7.4%, as compared to 7.7% in 2013 and decline further to 7.1% in 2015.

Meanwhile, the IMF data also projected growth in the Asean-5, comprising Indonesia, Malaysia, Philippines, Thailand and Vietnam, to slow down to 4.7% in 2014 before recovering to 5.4% in 2015, compared to 5.2% growth in 2013.

Outside Asia, growth in the US is projected at 2.2% in 2014 and 3.1% in 2015, compared to 2.2% growth in 2013, while growth in the euro area is expected at 0.8% in 2014 and 1.3% in 2015 after a 0.4% contraction in 2013.

Fatty alcohols is the building blocks of chemical derivatives such as surfactant used for end products in shampoo, liquid soap for bodywash, facial and body care as well as in homecare products such laundry detergents and other industrial washing detergents.

The major derivatives for C12-14 fatty alcohols, which accounts to more than 60% of fatty alcohols productions in southeast Asia, is used for sodium laureth ether sulphate (SLES), a major foaming agent found in shampoo and bodywash formulation.

However, a growing population for the middle class income group in addition to rapid urbanisation will still spur demand for the consumer goods in personal and homecare sectors, as people place more focus on personal hygiene and appearance. They also have higher disposable income to afford better quality materials, according to industry analysts.

According to Chris de Lavigne, global vice-president of consulting for the industrial practice at Frost & Sullivan, Asian demand for fatty alcohols will still outpace the growth level in Europe and North America through to 2022, with China and India leading the way, and expected to grow at a compounded annual growth rate (CAGR) of 8.9% and 10% respectively, from 2012-2022.

Meanwhile, the CAGR for North America and Europe is estimated at 0.9% and 1.1% respectively over the same period.

Nonetheless, in the nearer term, PKO volatility, overcapacities in fatty alcohols amid rapid expansion in the past three years, in addition to competitive landscape in downstream derivatives such as alcohol ether sulphate (AES) in China have dragged down overall market sentiments in 2014.

Two new fatty alcohols plants, including one plant outside the Asia Pacific, is expected to start up in 2015, a delay from the initial start-up schedule of 2013/2014.

These new plants will potentially boost the total annual nameplate capacity of Asia’s fatty alcohol market by an 260,000/tonnes by the end of 2015, according to a survey by ICIS. The current nameplate capacity is around 2.1 tonnes/year.

“With an average global growth of 3-4%, a 10% upstream expansion will result in oversupply situation, said one northeast Asian alcohol ethoxylater.

Talks of four new fatty alcohols plants in China, since July 2014, which will total around 400,000 tonnes/year of capcaity, further fuelled worries about the oversupply situation. These four plants are expected to start in late 2015/2016 according to local sources.

Export prices for C12-14 fatty alcohols were at $1,230-1,300/tonne FOB (freight on board) SE (southeast) Asia, on 17 December, based on ICIS pricing. This represent more than 40% decline from its highest price at $2,000-2,200/tonne FOB SE Asia in 12 March 2014 following the decline in PKO prices.

Feedstock prices of PKO – also known as lauric oil – was buoyed by crop damaging weather patterns, such as El Nino, a dry spell phenomenon affecting crops growth and fruits production. These expectations boosted prices to above $1,400/tonne DEL (delivered) south Malaysia in March 2014, as speculation of supply shortage for rival oil, coconut oil, in the aftermath of typhoon Haiyan in November 2013, drives PKO prices further. Although feedstock prices subsequently corrected itself in mid-year onwards, mid-cut fatty alcohols prices were not falling in line with the drop in upstream market, sources said.

In late December, PKO in the cash market was at around $930/tonne DEL south Malaysia, although drastic fluctuations of around $50-100/tonne were seen within a few days on 8-10 December, on worries of typhoon Hagupit’s disturbance, lead several market players to the sidelines. Slower seasonal production in year-end also boosted PKO prices which further prevented significant downward trends in C12-14 fatty alcohols prices despite the slower-than-expected demand.

However, the overcapacity in derivative downstream market, particularly in the Chinese alcohol ether sulphate (AES) sector, for the production of SLES, lead many of these buyers to be resistant of higher prices in fatty alcohols pricing despite firm feedstock costs. Also, the drastic downward trend for ethylene oxide (EO), the co-feedstock for alcohol ethoxylation production, further fuelled the wariness and buying resistance in the major Chinese market.

Moreover, the recently implemented 20% safeguard duty against fatty alcohols imports, originating from southeast Asian major production facilities, beginning from 28 August, has lead to decreased imports from the Indian market. The duty is valid for 200 days and will apply to imports of the material from Malaysia, Indonesia and Thailand, according to the country’s Ministry of Finance.

“Some fatty alcohols buyers in India might switch to importing non-dutiable alcohol ethoxylate or AES, for their surfactant production line”, said a major broker in India.

Nevertheless, high PKO costs in the third quarter, which contributed to the major production cost for fatty alcohols, coupled with buying resistance , consequently lead several major suppliers to reduce operating rates since the second half of 2014.

“Our plant have been operating at around 60% or lesser for more than 3 months, since the buying and selling gap could not be narrowed,” said one major southeast Asian producer.

“We would be selling at below production cost at the current level at around $1,200/tonne FOB SE Asia and only barely covering production cost if some of us manage to hedge feedstock cost earlier,” said another major southeast Asian producer.

Sellers were said to be jostling for market share despite selling at below production cost in late 2014 as buyers continued to exert downward pressures on pricing given their inabilities to pass down cost and incurred higher cost from March-June 2014.

“It’s either they sell at a loss now or they lose market shares with the current overcapacities and downstream situation,” said one southeast Asian trader.

“We can only hope that there will be improved downstream market in 2015, since controlled productions for such a long time doesn’t seem to work,” said a major Chinese producer.

“There is ample supply at attractive prices from so many sellers, we doubt the supply situation is tight, as what they [producers] claimed to be, although we heard production rate have scaled below normal level,” said a south Asian buyer.

Nonetheless, several cautious buyers expect prices to uptrend in the first quarter, if supply level in the pipeline continued to be low and PKO were stable during those period.

“Typically, demand for C12-14 fatty alcohols would pick up ahead of major festive season in China, and that would be in January,” added one sulfonator in south Asia.

Additionally, a growing number of industry major players are moving downstream into surfactants – a key market for oleochemicals in an attempt to ensure value-chain utilisations.

This includes Musim Mas Group’s ethoxylation facility at Dow Chemical’s site in the Netherlands that is expected to come on stream in 2015, according to LMC consultant Khor Yu Leng.

SABIC’s new natural fatty alcohol plant in Saudi Arabia, that will be integrated back to the company’s ethylene oxide derivatives business, as well as Wilmar’s acquisition of Huntsman’s European commodity business and ethoxylation facility in France, are other examples, Yu said.

The recent acquisition of Belgium-based surfactant company TensaChem by KLK Oleo, another major player for oleochemical industry, also indicated downward integration as a trend moving forward. 

In a statement with Bursa Malaysia on 11 August 2014, KLK said it has entered into an agreement with GRI Group Ltd and three individuals to buy the entire issued and paid-up share capital of TensaChem. TensaChem is a surfactants supplier for the personal care and home care sectors. The manufacturing of alcohol ether sulphates, alcohol sulphates and sulphonic acids makes up about 96% of its business. TensaChem’s operations are based on a 10 hectare manufacturing site located on the outskirt of Leige, Belgium.

On completion of the acquisition, TensaChem would be a subsidiary of the group, and it would result in “positive synergies” for the group’s oleochemical operations in Europe and extend the value chain in the oleochemical division’s business.