Fatty acids and their chemical derivatives are largely used in cosmetics and toiletries such as shampoos, liquid detergents, fabric softeners and body lotions.
They are also used as lubricants and plasticisers in rubber and polymer processing because they improve the performance of paints, plastics, lubricants, textiles and rubber products.
Additionally, fatty acids add qualities to foods – and other materials.
Fatty acids are derived primarily from vegetable oils such as palm and coconut oil. Palm oil and palm kernel oil are the raw material used for fatty acid production in Malaysia and Indonesia, while coconut oil is used in the Philippines.
Fatty acid production in Asia, particularly in southeast Asia, accounts for around 80% of global fatty acids production.
From 2010-2015, global fatty acids capacity more than doubled, and it nearly tripled in southeast Asia, with Indonesia seeing five-fold growth.
With capacity growth outpacing demand, the global market is expected to remain oversupplied for at least the next five years.
In Europe, fatty acids are also produced from tallow fats. The basic acids from this production are the C18 stearic and oleic acids.
Glycerine is a co-product of fatty acid production.
The global oleochemical industry is facing 10 years of overcapacity. Supply represents about 2m tonnes/year of excess capacity while fatty alcohols is likely to be at about 1m tonnes/year of overcapacity.
However, in recent years, global fatty acid demand has increased as a result of end-use consumption growth, as well as the growth of chemicals containing fatty acids, fatty alcohols and glycerine.
Oleic grades tend to be in higher demand to stearic grades in Europe, and these continue to trade at a premium as a result.
There is a strong competition between vegetable and tallow-based fatty acids. More agile customers, particularly in the surfactants sector, are able to switch between the two grades, in order to take advantage of price differentials.
That being said many buyers are tied to a particular type of fatty acids in their downstream operations.
With prices of both palm stearic and palm oleic grades now priced higher than the tallow-based alternatives, demand for tallow grades could increase.
Palm oil yield has been significantly affected recently by the extreme dry and hot weather brought about by El Nino, which many believe has been at its strongest in the last decade.
Since October 2015 palm kernel oil (PKO) production in Malaysia has been on a steady decline. Even with the start of the traditional palm season, PKO production in April of this year in Malaysia was around 18% lower year on year.
Global price trends in fatty acids and raw materials both affect European prices. In March 2016, fatty acid prices in Asia embarked on a strong uptrend along with feedstock prices.
In Europe, prices in the second quarter were stable to firm, gaining up to €120/tonne over first quarter levels, depending on the grade. Tallow-based products saw the lesser gains, and palm-based products maintained a premium over their tallow counter-parts.
This was largely attributed to the spike in palm feedstock costs, and subsequent global fatty acid prices of palm-based products. While raw tallow prices were considered to be largely stable producers were able to pressure second quarter contract prices on the back on general firming trends in the European region.
Upstream pricing trends are expected to be the key drivers in fatty acids markets going forward, particularly for palm-based products. A big factor will be the impact El Nino has on palm production.
If raw material prices go up due to lower yield, producers will continue to face the challenge of squeezed margins as end-users are unable to absorb the increase in costs.
According to the recently released production data from Malaysia, crude palm kernel oil (CPKO) production dropped around 30% year on year in May to 153,826 tonnes compared with 218,716 tonnes for the same period last year.
Crude palm oil production also dropped from 837,953 tonnes in May 2015 to 667,246 tonnes this year, representing a drop of around 20% year on year.
Analysts believe that the shorter supply will provide upward support for PKO prices. Some suggested that the earlier draughts caused by El Nino will continue to affect production yield until at least August.
It is expected that continued upward pressure on prices for palm-based feedstocks will, in turn, influence European fatty acid price trends. Meanwhile, supply and demand fundamentals within Europe are expected to be largely stable.
Sources have suggested a continued period of feedstock, and subsequent price, volatility could encourage some hesitant buying habits from European customers, which could create the impression of weakening demand.
That being said, sources say underlying demand is expected to remain unchanged due to steady downstream requirement in the European market, though there is some suggestion that shorter agreements could take preference over quarterly settlements.