More restructuring ahead for oleochemicals

2009 was another tough year for the global oleochemicals market. Expect more restructuring in 2010

THE HAPPY days of 2007 to early 2008 seem to be millennia ago for the oleochemical industry, as 2009 was characterized by many producers and consultants to be one of the toughest years ever for the industry. Optimism is not high for complete recovery in 2010.

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“2009 was definitely a tough year for oleochemicals. Contrary to other years when certain regions provided a counterbalance to other regions, we had this time a global negative impact,” says Klaus Nottinger, managing director of Germany-based consulting firm OleoConsult.

“Last year was not a great year for oleochemicals. While some of the segments made a recovery from the depths of the recession, the markets in general are not back to where they were and will likely take some time before they will [be],” notes Norman Ellard, director of Singapore-based consulting and trading company Rohen.

The first half of 2009 saw an almost paralyzed market, notes Neil Burns, managing partner for US-based consultancy Neil A. Burns. Demand for basic oleochemicals plunged in the first quarter (Q1) of 2009, he notes, while prices of fatty alcohols and acids were not indicative in any way of longer-term trends or market conditions.

“The first half of 2009 saw some shockingly slow business conditions that most executives in our industry have never before seen in our careers. The lack of true information in pricing led to reluctance to do business,” notes Burns.

All three consultants agree that a slow recovery was seen in the second half of 2009, although profitability is still down, especially for fatty acid and glycerin producers.

Based on current market conditions, industry restructuring is a certainty this year, says Timothy Rush, vice president and general manager of US-based Oleon Americas, a subsidiary of Belgian oleochemical producer Oleon.

“The entire oleochemical market finds 2009 with financial books and capital utilization significantly lower than the previous year. Reduced profitability continues to leave the door open for further consolidation,” he says.

DOOM AND GLOOM
In the US, overall oleochemical demand dropped by 20-30% in Q1 2009, compared with Q3 2008, notes Don Ciancio, vice president at US-based Vantage Oleochemicals (formerly Uniqema Americas).

“This led to poor industry occupancy, probably at 70-80%, and very marginal overall profitability in the industry for most of 2009. Recovery has been very slow for the last year and overall demand is still below Q1 2008 levels,” says Ciancio.

European fatty acid and fatty alcohol volumes were down by as much as 25% in Q1 2009 versus Q1 2008, says Nottinger. Demand for the commodities, however, started to rebound in mid-2009, as customers refilled their inventories, he adds.

Asian fatty acids, meanwhile, are still at 60-70% capacity utilization, says Ellard.

“This makes it extremely difficult to be profitable in this business,” he says. “Fatty alcohols likely fared better due to a tighter product focus into surfactants, which could recover before most other markets.”

Capacity overhang continues to be one of the biggest challenges for the oleochemical industry. While Europe and North America have had massive capacity closures over the years, Asia continues its expansion, although some projects were delayed, said Cheah Seng Chye, general manager for fatty acids at Malaysia-based IOI Oleochemicals Group, who presented at the ICIS 7th World Oleochemicals conference held in Berlin, Germany, in late October 2009.

“Asian oleochemicals demand last year was at 2m tonnes and overall plant capacity at 7.7m tonnes, excluding soap manufacturing,” said Chye at the conference. “There have been delays on plant expansions in Asia due to the global economic slowdown. Global utilization of oleochemical capacity is seen at 60-65%. In Indonesia, some plant utilization is even less than 50% of capacity.”

Chye noted two 150,000 tonne/year fatty acid plants – one in China and one in Indonesia – currently being built by Singapore-based Wilmar International.

On the other hand, three Western oleochemical facilities are currently for sale, notes Rush. No other details were disclosed about these facilities but another producer points out the closing of a 100,000 tonne/year UK fatty acid and glycerin plant last year by UK-based specialty chemical firm Croda.

Croda’s marketing manager of process additives, Vincent Bogaart, confirms the company’s capacity usage last year was below target because of poor demand and severe competition. Croda, however, saw a turnaround in Q3 and a recovery in Q4, says Bogaart. “Currently, Croda factories are full again, but I believe others in the market are still struggling, and occupancy is still below their target levels,” he adds.

CAPACITY PROBLEMS
Many predict the capacity overhang worldwide will remain for the next few years, leading to further rationalization of smaller and higher-cost capacity.

“I would expect consolidation to take place both regionally, such as in Asia, where maybe the amount of players has to consolidate further, and globally, with more Asian producers having a look at European opportunities,” says Nottinger.

Asian palm plantation companies are expected to do better than most, notes Burns, as they continue to vertically integrate their operations and invest more in downstream processing of their feedstock.

He cites examples such as Malaysia’s Kuala Lumpur Kepong (KLK), which is now firmly ensconced as an ethoxylated surfactant producer in Europe via its acquisition of Switzerland-based alkoxylation company Dr. W. Kolb in 2007; and Sime Darby, the world’s largest palm oil producer, which now owns 50% of the newly named Emery Oleochemicals, formerly the oleochemical business of Germany-based Cognis.

“Clearly the trend is now established and we should see additional downstream integration by the large plantation companies as they seek to capture additional value from their control of the key vegetable oil resources,” adds Burns.

Not many merchant market-only players, especially in the US, are left to choose from, however, because there is too much capacity to have reasonable returns, notes Ciancio.

“Consolidation should take place but we would guess that all of the current players to the merchant market assume that it will be someone else and not them,” he muses.

WHAT’S IN STORE FOR 2010?
It is hard to be optimistic right now, says Ciancio, when the slow economic recovery hinders needed investments. Government actions, especially concerning biodiesel subsidies, also place uncertainty on future supply and demand for raw materials and energy costs for the oleochemical industry.

In recent years, a large portion of crude glycerin has come from biodiesel manufacturing, which has all but ended in the US. Glycerin is also a coproduct of fatty acid.

“One can always hope that the economy recovers quickly and the government will make wise decisions,” adds Ciancio.

Companies such as Croda, Dutch specialty chemical company AkzoNobel, and US-based Evonik Goldschmidt, which consume most of their own production, seem to have recovered faster.

AkzoNobel notes a better demand for oleochemicals coming from the consumer market. The company consumes all of its fatty acid production in Morris, Illinois, US, in the manufacture of products such as surfactants and polymer additives.

“We found the industrial segment suffered more than the consumer counterparts. The consumer sector held up better as many consumers did not stop cleaning their homes, although they did purchase more value brand products to cut costs,” says John Cate, global business director, fabric and cleaning applications, AkzoNobel Surface Chemistry.

The industrial area, he notes, was hit hard by the tanking of the automotive market and the general decline in travel and entertainment.

Evonik also consumes all its fatty acid currently being produced in Mapleton, Illinois. Dave Del Guercio, senior vice president and general manager for Evonik’s global household care business, notes the company’s fatty acid volume production as stable and steady through most of 2009.

Most of Evonik’s fatty acid consumption in Europe is for consumer market applications, and in North America for both consumer and industrial markets.

“We actually were a net buyer of fatty acids last year,” says Del Guercio. “While the industrial market applications have been weak in North America, demand from the consumer markets was steady and somewhat stronger in Europe than in North America for us.”

The problem, says Del Guercio, is the glycerin market, which remained weak for all of 2009.

“Glycerin has been generally weak across the board. We certainly hope there will be some pick-up in 2010,” he says.

NEW USES, NEW DEMAND
Both Evonik and Vantage Oleochemicals note the potential demand for glycerin coming onstream in the next two years from new uses such as the manufacture of glycerin-based propylene glycol (PG) and epichlorohydrin (ECH).

US agribusiness major Archer Daniels Midland (ADM) already announced plans to start its 125,000 tonne/year PG plant in the first quarter, which is expected to consume 100,000 tonnes/year of crude glycerin.

Belgium-based producer Solvay plans to complete the construction of its new 100,000 tonne/year ECH plant in Mab Ta Phut, Thailand, in Q2 2011. The plant is expected to consume 120,000 tonnes/year of glycerin.

“I think the industry needs to focus on glycerin demand and the subsequent value generation. If this situation improved, I think the oleochemical industry would be a much happier place in 2010,” says Ellard.

Growing new markets for green-based chemicals also bode well for the industry, the producers say. “There is a growing environmental push to replace petrochemical alternatives. Croda is focusing its attention on a couple of areas for this,” says Bogaart.

“I believe each of the major oleochemical companies are investigating several green technologies for future promise, but none are in a position to share these activities just yet, including Oleon,” notes Rush.

“Sustainability is definitely a big driver of growth. Clearly, you see consumer product companies wanting to be more sustainable and environment-friendly. Our opportunity is to satisfy those interests and to make better use of our oleochemicals in this area,” says Evonik Goldschmidt president Reinhold Brand.

The challenge for oleochemical suppliers, says Cate, is to deliver innovative, sustainable products that are also ­cost-effective.

Read Doris de Guzman’s Green Chemicals blog

Global Oleochemicals Production 2009 (‘000 tonnes)

Global Glycerin Market 2009 (‘000 Tonnes)