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Tropical oil-derived and synthetic surfactants have traded market dominance over the years based on factors such as consumer preference, capacity availability, and raw material prices. The late 1990s were the synthetics' golden age. Today, it's palm-kernel- and coconut-oil-based products that have the upper hand.
Producers of synthetic detergent ingredients--be they ethylene-based fatty alcohols or linear alkylbenzene--are suffering from high raw material costs and, in the case of LAB, an oversupplied market. Producers of tropical oil-based alcohols, in contrast, have seen their raw material costs moderate and are now enjoying a production cost advantage that is allowing them to expand.
COVER STORY
A Tale of Two Raw Materials
The result is a flurry of tropical oil-based oleochemical construction projects across Southeast Asia. The ethylene-based alcohol industry, meanwhile, is not building and in fact is seeing its production capability erode.
The lack of investment is not due to poor demand. David G. Naugle, vice president of Shell Chemicals' higher olefins and derivatives business--one of the world's leading producers of ethylene-based alcohols--says his company's Geismar, La., plant increased its detergent alcohol output by 10% last year. "The volume performance of the marketplace has returned," he says, "but the economic performance is lagging behind the rest of the chemical industry."
Naugle points out that oil and gas prices can move up daily, and ethylene prices monthly. Alcohols and alcohol ethoxylates sold to major detergent manufacturers, however, are generally sold under contracts that don't allow for this kind of rapid movement. Hence, alcohol makers have had to absorb price increases frequently but are only able to pass them on to customers occasionally.
Given the feedstock volatility in recent years, Naugle says the surfactant industry is trying to change this. "We are seeing a movement away from arrangements with six- or 12-month fixed prices or with price protection. I expect we will see more formula pricing and other different price structures," he says.
SPECIALTIES Cationics Makers Share Industry Woes
Nonionic and anionic surfactants, typified by alcohol ethoxylates and linear alkylbenzene sulfonates, respectively, are considered the workhorses of the cleaning products world. Cationics, which are generally nitrile derivatives of fatty acids, are a more specialized and smaller volume breed. Nonetheless, cationics producers aren't immune to the surfactant business' profit problems.
Akzo Nobel, one of the world's leading producers of cationic surfactants, says demand in 2004 picked up considerably in all global regions and across most market segments. But according to Francis X. Sherman, manager of Akzo Nobel Surface Chemistry, the firm also saw double-digit increases in energy and certain feedstock prices that eroded profit margins during the year.
Thanks to the good customer demand, Sherman figures that most cationics producers are running close to capacity. "Profitability of this industry, however, is below reinvestment levels, and we don't see financial justification for capacity expansion until margins improve," he says.
Degussa is the other big cationics maker. David Del Guercio, director of Degussa's textile care business in North America, notes that his company has made significant investments at its U.S. plants in recent years aimed at increasing automation and efficiency and bringing production costs down. "We achieved cost savings," he says, "but the improvements have been largely offset by raw material and energy cost increases."
One answer to profitability woes may be further consolidation. Degussa and Akzo Nobel have been active industry consolidators in recent years--they both acquired surfactant businesses from the former Witco, for example--and Sherman believes more such consolidation is needed to make the business sufficiently profitable.
"We believe the surfactants industry is at a crossroads," he says. Some products provide value to customers and make enough money to be sustainable. "But other product areas have been commoditized and will not be sustainable without more industry restructuring."
SYNTHETIC ALCOHOL producers will no doubt be aided in their push for more flexible pricing arrangements by the current tight supply-and-demand balance in the marketplace. Naugle calls it an "economic tightness": The physical capacity to supply customers is there, he says, but production economics are steering ethylene toward products such as ethylene oxide/glycol or polyethylene that are more attractively priced.
Mark Quintyn, commercial director of Spain's Petresa, a leading LAB producer, says his firm is saddled with the same feedstock dilemma as alcohol makers, plus an added oversupply problem. Quintyn counts 3.3 million metric tons per year of nameplate capacity in the global LAB industry, against just 2.5 million metric tons of demand last year.
He laments that, because of contractual obligations, LAB makers had to absorb most of the early-2004 feedstock cost run-up and then try, gradually throughout the year, to increase prices to make up for it. In the end, though, producers came out behind. "The 2004 feedstock situation has eroded the profitability of this business to unsustainable levels," Quintyn says.
Sasol, a big maker of LAB and detergent alcohols, took steps in its fiscal year that ended June 30 to respond to difficulties in the LAB business. The company kept its Porto Torres, Italy, LAB plant idle and reduced employment in the country. It also cut overall North American surfactants employment by 10%. Still, Sasol says it lost $10 million in its olefins and surfactants business in the fiscal year.
The view from the "natural" fatty alcohol business, on the other hand, is a bit sunnier. Norman Ellard, director of global sales for Procter & Gamble Chemicals, a leading oleochemical producer and marketer, says the dark days were a few years ago, when new plant construction led to oversupply and the fatty alcohol market looked like it had enough capacity to last a good seven years.
However, alcohol producers started paring back with plant closures or idlings, including BP in Texas, Shell in Louisiana, Huntsman Corp. in England, Mitsubishi Chemical in Japan, and ExxonMobil in France. Joel H. Houston, president of the consulting firm Colin A. Houston & Associates (CAHA), says global capacity for C12 and higher alcohols fell from 2.25 million metric tons in 2002 to 1.98 million metric tons by the end of 2004.
Late 2003 and early 2004, meanwhile, brought a sudden upturn in growth, Ellard says. "We had anticipated that there would be a need for new alcohol capacity but did not anticipate it would come that quickly," he adds. "Essentially, the alcohol market was undersupplied for all of 2004."
P&G's reaction to the market tightness was to strike a deal in January to market fatty alcohols from a 40,000-metric-ton-per-year plant that Indonesia's Sawit Mas Group was building by 2005. By the fall, P&G and Sawit had expanded their agreement to include a second plant that would add 100,000 metric tons of capacity by 2006.
At the same time, P&G is expanding its Kansas City tertiary amine plant by 10,000 metric tons and getting ready to boost its Sacramento, Calif., fatty alcohol plant by 15,000 metric tons. The company is adding another 30,000 metric tons of alcohol capacity through agreements with other firms. And Ellard anticipates expansion of P&G's FPG Oleochemicals joint venture with Felda Palm Industries in Kuantan, Malaysia.
OTHER NATURAL alcohol expansions include a 60,000-metric-ton project launched in Batam, Indonesia, by Singapore's Ecogreen Oleochemicals. Marketing Director Willy Sutanto says the plant will open in the first half of 2006, complementing the firm's 120,000 metric tons of existing alcohol capacity.
Last month, Japan's Kao Corp. announced plans to invest $68 million in a 100,000-metric-ton fatty alcohol plant to open in the Philippines by mid-2006. Kao says the project will raise its overall capacity to 300,000 metric tons. And echoing P&G, Kao is boosting tertiary amine output at sites in Europe, the Philippines, and Japan to what it calls the world's largest capacity of 50,000 metric tons per year.
The expansion activity is more subdued on the synthetic alcohol front. Naugle points out that Shell maintains 100,000 metric tons of idle alcohol capacity in Geismar but says the profit picture doesn't support restart at the moment. He says the project would take about nine months if given the green light.
Mike Clark, Sasol's director of sales and marketing for alcohols and surfactants, says his firm has delayed until 2007 plans for a second facility in Secunda, South Africa, that would exploit the company's coal-based feedstock pool. However, he says the delay will permit evaluation of an increase in capacity beyond the 120,000 metric tons originally planned.
A comparison of feedstock prices sheds light on the disparity in expansion activity between the alcohol industry's ethylene and tropical oil camps. According to CAHA, palm kernel oil was priced at $405 per metric ton in July 2003, peaked at $710 in April 2004, and then fell to about $655 today. Ethylene was $640 per metric ton in July 2003 and has increased steadily to reach $915 today.
Although ethylene is expensive--and by many accounts is poised to stay that way for a while--CAHA's Houston isn't ready to declare oleochemicals the winner of the detergent alcohol wars. He recalls that an early-1990s oleochemical buildup in Malaysia bogged down when tropical oil supplies fell short and prices rose. Still, he says, "if you have a source of oil--and customers locked in--it does look like the economics will favor you over the next few years."
While oleochemical makers may have the upper hand for the near term, the dearth of capacity is likely to lead to better business conditions--and prices--for producers of all alcohol types. According to Ellard, P&G expects "the supply situation to continue to be tight for 2005." Kao is more dire in its assessment, saying its Philippines project is in response to a "severe supply shortage."
By 2006, Ellard says, the market should be well supplied again. Ecogreen's Sutanto acknowledges that other firms--particularly Malaysian producers of fatty acids--are also exploring fatty alcohol production, and that overcapacity could emerge if too many of them enter the business.
However, Sutanto is philosophical about this prospect. "Oversupply is a possibility in any industry," he says. "The tendency to jump in at the best time will always result in oversupply in the few years that follow. It is a natural industry cycle."
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