Chemical profile: Asia fatty acids

USES

Fatty acids are used in diverse consumer-related applications such as soaps, detergents, personal care products, and the food, flavouring and fragrance sectors. It is also used in industrial applications for the pharmaceutical, lubricant, textile, plastic, paint and rubber sectors.

SUPPLY/DEMAND

Supply in Asia has increased significantly over the last five years on strong growth of the oleochemicals industry as well as rapid capacity expansions especially in southeast Asia, which accounts for around 80% of global fatty acids production.

From 2010-2015, global fatty acids capacity more than doubled. Capacity in both China and India more than doubled, and it nearly tripled in southeast Asia, with Indonesia seeing five-fold growth.

With capacity growth outpacing demand, the market is expected to remain oversupplied for at least the next five years.

And with the reduction in palm oil yield, Malaysia and Indonesia have amended their tax policies to discourage raw material export. As a result, costs for producers outside these countries have significantly increased, making them less competitive.

Demand for fatty acids in Asia has weakened considerably over the last two years as a result of the slowdown in the global economy, particularly in the key consumer market of China.

Poor material consumption from downstream industries and reduced industrial activities in major markets meant that the demand for mid-cut fatty acids and triple pressed stearic acids (TPSA) has remained sluggish since the second half of 2015.

As a result of the long supply of C12 lauric acids and C14 myristic acids – the main fatty acids products – many producers have reduced the utilisation of the lauric lines. This in turn limited the generation of the short-chain fatty acids and C18 oleic acids.

PRICES

Fatty acids prices in Asia have been on a steady decline since Q2 2015. Prices rebounded momentarily in Q4 2015 on higher raw material prices. In March 2016, fatty acids prices embarked on a strong uptrend along with feedstock prices.

Palm oil yield has been significantly affected by the extreme dry and hot weather brought about by El Nino, which many believe will be 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 Malaysia in March and April 2016 were around 18% lower year on year.

Supported by increased raw material costs, C12 lauric acids reached a high of around $1,650/tonne FOB (freight on board) SE (southeast) Asia in mid-April.

As a result of long supply, the premium that C14 myristic acids used to enjoy over C12 lauric acids has eroded, even though C12 lauric acids and C14 myristic acids are generated at a 3:1 ratio.

Since late 2015, C14 myristic acids were heard trading below C12 lauric acids.

Prices of the short-chain fatty acids and C18 oleic acids have been relatively stable, supported by lower production with many producers in the region running their lauric lines at lower rates.

FEEDSTOCKS

Malaysia and Indonesia are the major production hubs for global fatty acids because of raw material availability and government incentives for value-added palm industries. The major feedstock is palm oil, while coconut oil is sometimes used for certain fatty acids. The major products for Asia fatty acids are C12 and C14 fatty acids, and triple-pressed stearic acid (TPSA). Outside Asia, C18 fatty acids are produced from animal fats or crude tall oil.

OUTLOOK

An uncertain economic outlook continues to weigh on the industry. Many believe that demand from China will continue to be sluggish going forward.

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 due to poor downstream product sales.

Demand in Asia, especially for consumer related products, will be led by countries such as China and India, as well as southeast Asia because of growing populations; higher disposable incomes; and lifestyle changes.